Dickinson Technologies
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Question 1. Assessing the Fraud Risk Factors: High Risk factors and Low Risk Factors.
High Risk Factors:
Management’s attitude towards overriding controls: Section 5, under topic Integrity and ethical values, of the questionnaire suggests that override could occur without management’s approval, manager’s override is not explicitly prohibited and no interventions by the management were observed.
The Degree of oversight related to the company’s control structure exercised by the management: Section 4, under topic Assignment of Authority and responsibility, of the questionnaire suggests that the Supervisors have broad levels of authority and the responsibility of day-to-day decisions lies on the shoulders of the supervisors and on tope of that the senior management does not exercise significant oversight on such decisions and activities.
The controls related to safeguarding the assets: Section 3, under topic Management’s Philosophy and Operating Style, of the questionnaire suggests that control system to protect valuable assets exists, but, number of examples of failure to adhere to the system or lack of appropriate management oversight were observed.
The segregation of duties, particularly in key functions: in many sections of the questionnaire it is clearly stated that there is no clear segregation of duties. Many tasks are overseen by the supervisor’s only. In Section 6, under topic organizational structure, it is stated that some examples of supervisors fulfilling the dual responsibilities were observed.
Low Risk Factors:
Management’s accounting policy choices and financial reporting practices: Section 1, 3 and 5, under topic Management’s philosophy and Operating Style, suggests that management follows conservative approach in its accounting policies and financial reporting practices. Also, all financial reports are reviewed and approved by the controller, CFO and CEO before release and unit accounting personnel report to central financial office. So this area draws very less attention and has less potential for fraud risk.
The level of risk associated with ventures entered into by management: Section 1 under topic Management’s philosophy and Operating Style, suggests that management consider the potential risks and benefits of venture, carefully, before taking any action.
Management’s significant estimates and forecasts used for financial reporting: Section 5 under topic Management’s philosophy and Operating Style, suggests that the estimates made in the past were achieved successfully. This also suggests that the estimates are made carefully and are reasonable.
Medium Risk Factors: I consider the following as medium risk factor because there is no particular reason to consider them as high risk factor, but there are few points which make them risky as compared to the low risk factors.
1. The degree to which the board of directors exercises its oversight capacity over management
2. The assignment and communication of authority and responsibility
3. Management’s policies toward performance evaluation, promotion, and compensation of employees
Question 2.
Misstatement arising from fraudulent financial reporting:
Control environment, in general, is less likely to prevent fraudulent financial reporting. This type of fraud takes place when the higher management is involved and they, usually, are not obliged to follow the rules set by themselves. Also there is no authority, above them, which can oversee their misdeeds. There is a lot of pressure, from investors, and analysts, on them to meet the numbers and forecasts. So, they have pressure as well as opportunity to misstate the financial reports. They can also easily rationalize their behavior by saying that they did this for company and its employees.
On the basis of discussion in the Questionnaire, I would like to say, there is low risk of this type of misstatement in case of Dickinson Technologies. Management’s attitude towards the financial reporting and conservative approach in regards to choice of accounting policies, management’s stress on integrity and ethical values, the board of directors’ oversight and senior management’s frequent contact with managers of subsidiaries make fraudulent financial reporting appear less likely.
It is evident from the questionnaire that the management set reasonable goals, which could be achieved, so there is no pressure on the employees/managers to misstate the financial reports in order to get bonuses (incentive).
Presence of Board of Directors, Audit committee, Board’s compliance with the SEC’s Blue ribbon committee, independent and experienced board members, management’s oversight and audit committee’s annual review’s leaves very less room for opportunity for employee’s to commit any type of fraud and present misstated financial information.
Performance evaluation based on the behavioral criteria, management’s stress on integrity and ethical behavior, employee’s awareness of the consequences of failing to fulfill their responsibilities are few of the major points which leave employees with no rational explanation for their misconduct. So, in case of Dickinson Technologies, I would say that the employees are not inclined towards misstating the financial information and thus the risk of fraudulent financial reporting in this case is very low.
Misstatement arising from misappropriation of assets:
Control environment, in general, is very likely to prevent misstatements arising form misappropriation of assets. Management’s proper control and oversight can prevent employees from committing any such fraud. If management participates fully in the hiring process of employees, distribute duties as per the qualification, properly segregate the duties and conduct timely assessments of effectiveness of the controls in place, it can successfully eliminate any risk of misappropriation of assets.
On the basis of discussion