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Accounting Irregularities

Accounting Irregularities            

Use the Internet or Strayer Library to research a recent accounting scandal within the last five years where the SEC accused public companies of accounting irregularities.

The legal liability found in third parties allows the bank, various financial institutions, vendors, employees, and stakeholders to sue the auditor for not realizing that the financial statements of a borrower are misstated. The financial documents of NutraCea gave an overstatement on the amounts of sale revenue by 36.5%. Also, there was a misstatement on the operating loss by 89% in the second quarter of the financial year, 17.6% in the third quarter, and 7% for the last fiscal period. The overstatements resulted from a false recording of sales, which was written as $2.6 million as the entry. The type of information is misleading and places the shareholders at risk of losing their investment. Also, the bank is at risk as they may not receive payment for their loan. The auditor of the financial documents was prepared and had the needed skills and knowledge to run such kinds of operations.

Analyze the audit report that the CPA firm issued. Ascertain the legal liability to third parties who relied on financial statements under both common and federal securities laws. Justify your response.

Since the company was in fraud with Bi-coastal, that is equally in for a conspiracy, if the auditor did the recalculation, it would be possible to trace and compare the prices present in the inventory. A comparison would have been made to the entry of the sales and the invoice as a verification top of the amounts recorded in the books of account. In most instances, the client usually retains the customer’s order, documents for shipping and sales invoices produced in duplicate for each of the transactions that have taken place (Financial Accounting Standards Board (FASB)). The information is readily available to both the internal and external auditors so that it would be easy to track who prepared the documents. After taking the necessary precautions, it will be possible to handle the issue of misstatements effectively. Therefore, the legal liability will be viable under both the federal and common securities. Under common law, there will be a legal suit for the third party that is involved. That would be applicable if a loss were explicitly incurred because of the misstatement. The suit will take place if the bank cannot gather a significant loan from a customer who is insolvent and, in the process, they are claiming a misleading financial statement. That is specifically if the information was used to create the loan, and the CPA firm needs to be held accountable for the actions and damages resulting from the issues. That is because the organization failed to carry out a financial audit with the needed care to ensure that everything is in place and accurate at the same time (Plewa et al., 1995). Under federal law, the litigants will perceive the remedies because of the presence of class action litigations and the potential of obtaining sustainable damages from the defendants.

The balance sheet is the statement present in the GAAS that the company violated in performing the audit. The violation cannot be treated as an omission or an error as it was intentional and notable (Plewa et al., 1995). The auditor would have either reported or made a claim immediately after they realized there was a misstatement in the balance sheet.

The administration of the CPA firm ought to convey more concern about the abnormalities that have been taking place within the organization. The data that resulted from the misinterpretation was arising from both the manager and the auditor. The management did spearhead the entire misinterpretation process. They were also in charge of reporting any misinterpretation that might have been experienced in the final statements (Plewa et al., 1995). The administration’s role was to keep an inward control framework that was satisfactory and increase the accuracy of recording information in the books of accounts. Neglect in the execution of any of the arrangements is what resulted in the misinterpretation. The negligence in the management results in extra costs of operation. The role of the management needs to be to provide the auditor with all the needed information required for a successful audit procedure. The role of the auditor, on the other hand, is to carry out an analysis of all the data that has been provided and ensure that they have been appropriately recorded in the books of accounts (Committee of Sponsoring Organizations of the Treadway Commission (COSO), n.p). The CPA firm needs to start by analyzing with an internal auditor before scaling up to an external one.

The SOX Act of 2002 is a transparency act. The act’s role is to offer protection to the investors from various fraudulent activities taking place within an organization. One of the sanctions available in the act is that of the bank or customers being able to sue the auditor. However, the suing can only occur if the financial statements were used to obtain a loan from the bank. With the sanction in place, the management and the audit firm will be held accountable for their negligence. The auditor knew there were misstatements in the various quarters of the year. Therefore, if losses are encountered among the investors, they can be sued for negligence and offer compensation.


Committee of Sponsoring Organizations of the Treadway Commission (COSO). (n.d.). ERM Integrated Framework Update. Retrieved from Welcome to COSO. Accessed 23 April 2021.

Financial Accounting Standards Board (FASB). (n.d.) Technical Agenda. Retrieved from Technical Agenda ( Accessed 23 April 2021.

Plewa, J. F., George, Jr., & Fiedlob, T. (1995). Profits Are an Opinion, But Cash is a Fact: Understanding Cash Flow. John Wiley & Sons.


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Auditors and Regulatory Oversight

The Securities and Exchange Commission (SEC) regulates public companies. The SEC has found that some of these companies have violated GAAP by using creative accounting practices to mislead investors and creditors regarding the health of their company.

Accounting Irregularities

Accounting Irregularities

Use the Internet or Strayer Library to research a recent accounting scandal within the last five years where the SEC accused public companies of accounting irregularities.


Write a 3–4 page paper in which you:

  • Analyze the audit report that the CPA firm issued. Ascertain the legal liability to third parties who relied on financial statements under both common and federal securities laws. Justify your response.
  • Speculate on which statement of generally accepted auditing standards (GAAS) that the company violated in performing the audit.
  • Compare the responsibility of both management and the auditor for financial reporting, and give your opinion as to which party should have the greater burden. Defend your position.
  • Analyze the sanctions available under SOX, and recommend the key action or actions that the PCAOB should take in order to hold management or the audit firm accountable for the accounting irregularities. Provide a rationale for your response.

Use the Strayer Library to locate at least two quality academic resources in this assignment. Note: Wikipedia and other similar websites do not qualify as academic resources.
This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course. Check with your professor for any additional instructions.

The specific course learning outcome associated with this assignment is:

  • Recommend sanctions for accounting irregularities based on an audit report, auditing standards, and financial reporting

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