Question

ABCable, Inc. is a publicly traded cable provider. Among its current services are providing cable services, including television, Internet access and local telephone service. ABCable experienced rapid growth in all markets beginning in the late 1990s and continuing through now. While revenues continue to grow, income is showing signs of declining to a level beneath that expected by analysts who follow the company. In an analysis of why, Sally Bens, financial vice president, discovered that maintenance of cable systems has become an increasingly large cost—particularly in new cable coverage areas. She pointed out to Bill Jones, the president, that in the relatively new areas maintenance is high, particularly when viewed from the perspective that the areas currently have few customers. Jones has suggested that it doesn’t seem right to face such high expenses when “everyone knows we will have a larger customer base in a few years in those areas.” Shortly thereafter, Bens and Jones decided to transfer out of Cable Maintenance Expense and into the Capitalized Cable account enough of these expenses to enable net income to meet analysts’ forecasts. Documentation in some cases was created indicating a correction of an error and in some cases no documentation was created to support the entries. Subsequently, these types of transactions were posted quarterly, on an “as needed” basis. Bens rationalized that it was indeed unfair to expense so much of the maintenance cost in rapidly growing areas. Jones didn’t give it a lot of thought other than to periodically remind Bens of how important meeting EPS growth rates was. The above scheme does not meet generally accepted accounting principles and led to materially misstated financial statements. Under generally accepted accounting principles, these transactions should have been expensed. Thus, the ABCable overstated assets and income. 1. Is this an example of fraudulent financial reporting or misappropriation of assets? 2. Audit requires a number of inquiries of management, the audit committee, internal auditors, and others. Which, if any, individuals responding to these inquiries might be likely to reveal this scheme to the auditors? 3. This is an example of management override. What is your point of view to minimize this? 4. Which fraud risk factors are present in this case? List them and cite the example from the case.

Answer 1

TY