Internal Audit

Corporate governance has comparatively getting important in the business world. The term ‘corporate governance’ and its daily application in the financial press is a fresh appearance of the past fifteen years or so (Thomsen, 2004). The phase of growth may refer to the evolvement of the economy, corporate structure or ownership groups, every of which influence the way corporate governance will grow and be adapted within its own country surroundings (Mallin, 2010).

A feature of specific significance is whether the company itself manipulates within a shareholder framework, concerning initially on the preservation or heighten of shareholder value as its major aim, or whether it takes a broader stakeholder channel, underlining the interests of various groups such as suppliers, employees, customers, providers of credit, and the local company (Morrison, Juleff, Paton, 2007). The Board member of IJM including six Non-Executive Directors and three Independent Non-Executive Directors, the Chairman is one of the Independent Non-Executive Directors.

The balance between the Board and the assist of management is to assure the fair representation and effectiveness for the shareholders, also further assures issues of resources, strategy and performance are fully addresses and investigated to concerning with long term interest of shareholders, corresponding stakeholders and the community in which the Group runs its business (IJM Corporation Berhad, 2012). In contrast, the Board member of OSK including one Non-Executive Chairman, One Chief Executive Officer and four Non-Executive Directors that three of whom are Independent Directors.

Similarly, The Board has established the roles and responsibilities of Chairman that is different and separate from the roles and responsibilities of Chief Executive Officer. The segregation between the roles and responsibilities of Chairman and Chief Executive Officer assures an appropriate balance of roles, responsibilities and accountability at Board level. The Chairman of OSK is not an independent director. Hence, OSK will comprise a majority of independent directors after his retirement.

As different with IJM, OSK has developed a Gender Diversity Policy to encourage the representation of women in the component of the Board (OSK Holding Berhad, 2012). The IJM’s Board is mainly accountable for company’s entire business performance strategic plans, supervise the proper business operation, risk management, internal control, shareholders’ communication, information systems and legal matters; and the management is responsible for the execution of the expressed policies and achievement of the company’s expressed goals.

The Directors have assorted set of skills, experience and knowledge required to manage the company. The Non-Executive Directors are professionals of engineering, finance, accounting, economics or experienced senior public administrators (IJM Corporation Berhad, 2012). The OSK’s Board is accountable for setting up objectives and offering the strategic direction for the Company. The Board also acting the important role in assuring sound and prudent policies and practices are in place and performs the negligence in management.

The Board has established a Sustainability Policy that initiates the business strategy to spur long-term corporate development and profitability, by including environmental and social issues in the business model. The OSK’s Board acknowledges and subscribes to the value of the principles and recommendations initiate in the Malaysian Code on Corporate Governance 2012 and Bank Negara Malaysia Guidelines on Corporate Governance for Licensed Institutions (OSK Holding Berhad, 2012).

The remuneration policy of IJM is based on the philosophy of offering higher weight on bonuses relating to performance. The performances of Directors are measured by the Directors’ feat and compliance to the Board and the Group. The Executive Directors’ and senior management’s remuneration relies on the performance of the Group, accomplishment of the objective and quantified organizational targets as well as Key Performance Indicators (KPI) set at the beginning of each year.

The strategic initiatives or KPI set for the Chief Executive Officer encompass the main areas of stakeholders, commercial, infrastructure and efficiency. For Non-Executive Directors, the level of remuneration reflects the contribution and level of responsibilities assured by the specific Non-Execution Director. On Employees Provident Fund statutory contribution rate of 12 percent, given additional contribution from one to five percent to all its employees depend on length of services (IJM Corporation Berhad, 2012).

The OSK’s Remuneration Committee conducts an annual review of the Directors’ remuneration whereupon recommendations are handed to the Board for approval. Such annual review shall assure the remuneration package of the Directors keeps adequately attractive to attract and retain Directors. The Executive Director does not participate in the decision with regards to his remuneration. The determination of the remuneration package of Directors is defined by the Board as a whole, with the Directors regarded precluding from deliberations and voting for own remuneration.

The proposed Directors’ fees for the financial year would be tables at the AGM for approval by the shareholders (OSK Holding Berhad, 2012). The IJM’s Board acknowledges its responsibility for maintaining a strong system of internal controls to protect the assets and shareholders’ investments, and to arrange stewardship responsibilities in determining principal risks and assuring the fulfillment of advisable systems to manage risks in accordance with the best practices of the Malaysian Code on Corporate Governance.

IJM has also established a Risk Management Committee (“RMC”) that is dedicated to perform regular reviews on the IJM’s risk profile. The RMC mainly develops, executes and maintains the risk management system to assure that the visions and objectives are achieved. The Audit Committee and assistance of the RMC, carries out standard evaluation on the risk profile through the Internal Audit Department, inspect and supervises the usefulness of internal control systems.

The Internal Audit Department fulfills internal audits on diverse operating units on a risk-based manner authorized by the Audit Committee annually (IJM Corporation Berhad, 2012). The OSK’s Board recognizes its mainly accountability to assure that principal risks are identified, measured and managed with appropriate system of internal controls, and to assure that the usefulness, sufficiency and integrity of the internal control system are reviewed on an ongoing basis.

The Audit Committee’s major role is to the system of internal controls essentially to manage the key risks intrinsic in the business and to deliver its findings to the Board. Earlier Completion Date of the Disposal of Subsidiary Companies, the Audit Committee presumed its roles and accountabilities by the Internal Audit Department. Consecutive to the Disposal of Subsidiary Companies, OSK has appointed an external professional firm to sustain the internal audit function.

Moreover, the RMC plays an important role in offering to the establishment of a further conducive risk management situation (OSK Holding Berhad, 2012). Corporate Social Responsibilities (CSR) is with regard to comprehension and administrant the connection among business operations and the economy, environment and communities in how we conduct the business according to Morrisons (2010). Morrisons proclaim that CSR concentrate on managing the social, ethical and environmental matters that are substantial to our commercial performance, via programme of successive enrichment.

As an outline, CSR is the ethical feature of a company towards society. Specifically means management acting responsibly in its relationships with our stakeholders who have a legalize interest in the company but not only the shareholders (Monk, 2004). The IJM attaches great importance to the conservation of environment. Therefore, when IJM are conscious and intense of the environmental impact it may struggle and lead to minimize the impact with efficient environmental plans in commitment with environmental regulations.

The initial step towards modeling this world a wonderful place starts at home, thus IJM’s several promises and efforts were originated to instill the accountability of caring for the environment among staff. A ‘Go-Green’ campaign where staffs undertake to introduce a better environmentally friendly approach in carrying out daily tasks. Else, a campaign to suspend the use of Styrofoam was initiated at the head office jointly with a recycling campaign.

IJM Land established several environmental campaigns called “Mud Ball Throwing” events as part of an activity to treat and rehabilitate polluted rivers and lakes. Effective Microorganisms mud balls are effective in eliminating sludge and other pollutants, and the event is a family-oriented fun doings which is used as a terrace for staff interplay and community engagement. Since IJM advocates its construction project sites to be environmentally conservative, a team from the Construction Division complied an eventful day at Zoo Negara.

By the assist of Zoo Negara staff, they ameliorated the landscape in chosen areas of the zoo and donated a bench for the ease of visitors to the zoo (IJM Corporation Berhad, 2012). OSK sights to decrease environmental impact in the scopes of waste, water, energy and air quality in the workplace by advocating the application of sustainable behavior in the preservation of company property and business premises, contributing the preservation and reducing of energy, use energy-saving equipment if applicable.

OSK has well nurtured a culture of re-use and recycle plastic which thus assures responsible waste disposal. In relevance with Clean up the World campaign, a community-based environmental campaign which arouses and empowers global communities to clean up and maintain their environment, the Group established the ‘Earth Warrior’ – ‘Reduce, Reuse, and Recycle’ campaign where staff were stimulated to use reusable food cases despite polystyrene packets or plastic bags for takeaways food.

OSK also indicated support for the environment by inviting the Truly Loving Company (TLC) to hold a one day promotion of its biodegradable, natural plant-based and environmentally-friendly range of TLC Green household cleaning products at Plaza OSK. Volunteer staffs also had the chance to restore to the earth through planting eighty “Tenggek Burung” young plants at Raja Musa Forest during a tree planting doings operated by the Global Environment Centre Reserve (OSK Holding Berhad, 2012). IJM’s community efforts concentrate on social welfare, education and sports development at grassroots level.

IJM teamed up with the Sau Seng Lam (SSL) Diabetes Care Centre for the symbolical structure of the BLUE Human Circle which is a global emblem for diabetes developed as part of the Unite for Diabetes consciousness campaign in World Diabetes Day 2011. The Plantation Division still proceeded its engagement with communities in its public healthcare events such as the ‘Breast Health Awareness’ outreach programme and the safeguard of medical care as well as sponsorship of medical provides to the Sugut-Paitan community.

IJM has also been providing scholarships to merit students for the previous 18 years. Nowadays the programme has advantaged over 170 students. IJM allocates tutors to every successful candidate to lead and counsel them during the curriculum of their studies and also during their internship programme at IJM. IJM’s involvement in rugby dates back to the 1990’s and its sponsorship of rugby upgrowth in Peninsular Malaysia is administered by associate with the Combined Old Boys Rugby Association (“COBRA”).

As such, IJM is pleased to be associated in an expound programme called the COBRA–CIMB Schools Rugby Development Programme in partnership with CIMB Foundation which their major concentrate is to raise the standard of rugby at school level (IJM Corporation Berhad, 2012). OSK aims to give back to harm communities through obligating and contributing resources; to create a positive social and economic collision for the betterment and comfort of the underprivileged and harm of the community.

During Chinese New Year, OSK’s staff surprised 70 residents at Little Sisters of the Poor, a home for the aged with boxes of mandarin oranges and food. OSK’s staff spent time with the residents, serve meals and feed the elderly folk who were aged between 70 and 99 years. OSK’s staff also offered Hari Raya cheer and gifts of Jusco vouchers with 45 single mothers and 65 children under the care of WIRDA (Women’s Initiative for Research, Development, and Advancement).

To better comprehend the embarrassments confronted by those without sight, OSK’s staff took part in the Blind Leading the Blind Charity Walk 2012, which was established by the Lions Club, funded by Malaysia’s Ministry of Health and sighted to increase funds to donate for cataract surgeries in need. Children at the pediatric ward of Sungai Buloh Hospital accepted great cheer from OSK’s staff that surprised them with boxes of stuffed toys, board games and other assorted toys as part of a Toy drive.

In order to aid replenish the local blood bank supply, OSK in cooperation with the National Blood Bank, established a Halloween themed blood donation, that have brought a harvest of 55 bags of blood (OSK Holding Berhad, 2012). A healthy, secure and advance working environment assures primary assets. As treasure in IJM’s core values, the Respect for Diversity is essential for whole business sustainability and IJM is promised to offering an environment where every staff no matter age, gender, race, religion, nationality and education has fair chance to succeed.

This healthy mix stimulates the staff to attain their full potential whilst working together in harmony to reach organizational goals and sustainable growth. Successive growth of skills and capabilities of IJM’s staff play an essential role in attaining the best results and as such IJM places high vital in trainings which are planned to assist its staff exploit themselves for their future and organization’s future. A training needs analysis database has been spread to determine and collate gaps within the recent knowledge and skills with what is required.

Furthermore, IJM’s Engineers’ Training Programme offers in-depth knowledge and vision into the construction industry thereby intending graduate engineers for the frequent demanding role of Project Manager. In justice of their loyalty, contribution and hard work, staffs that have fulfilled 20 years of service are awarded with a Long Service Award while staffs that have reached the retirement age of 55 and have served for more than 15 years are awarded with Retirement Awards in acknowledgement of their compliance and passion (IJM Corporation Berhad, 2012).

OSK realizes its employees as main assets and their compliance and support are valued immeasurably. OSK contends to offer in-coming talents with a conducive and productive environment to work and learn, and OSK believes that heightening employee motivation and welfare will dedicate positively to the long-term profitability, growth and sustainability. As part of OSK’s concentrate on the essential of staff health and well-being, OSK established talks and different programmes throughout 2012 to promote health awareness.

Amongst the health programmes included a MAKNA Breast Cancer Talk to increase consciousness on the vital of early cancer detection and defensive checks; a bone density check by Captivate Sdn Bhd, a subsidiary of the company which distributes Anlene milk; a Cholesterol Health Talk and a free health check including blood pressure, BMI (body mass index) and cholesterol test run by KPJ Tawakal Specialist Hospital; a health screening from the National Kidney Foundation which also included the provision of counseling by healthcare professionals and a Halloween themed blood donation run by the National Blood Bank (OSK Holding Berhad, 2012).

As a will to the IJM’s compliance to quality in contrast to OSK, IJM has achieved intense admission through winning several awards which included the Malaysian Construction Industry Excellence – Contractor of the Year Award 2009 and the International Achievement Award in 2007, 2006 and 2001 as well as Malaysian Corporate Governance Index – Industry Excellence Award (Construction) 2011. As a conclusion, IJM has better Corporate Governance and CSR system as compared to OSK and OSK still have far more space to improve their systems.

IJM not just achieves the desired financial bottom line by being competitive, yet they also being ethical and sustainable in this market. Question 2 The latest Malaysian Code on Corporate Governance 2012 (“MCCG 2012”) was published from Securities Commission (“SC”) on March 2012, and is valid from 31 December 2012. The MCCG 2012 was amended through considering altering market growths, international growths and the must always recalibrate and heighten the usefulness of Corporate Governance framework.

The MCCG 2012 is the initial key deliverable of the SC’s Corporate Governance Blueprint 2011 that plans a 5 year strategic operation scheme of the SC to upgrade the criterions of Corporate Governance in Malaysia (Christopher, 2012). The MCCG 2012 uses a fresh construction that offers better clarity, better intelligence for organizations and empowers to simpler reading. Virtually, every principle under MCGG 2012 is going with recommendations and commentaries. The principles encapsulate wide ideas consolidating well Corporate Governance which organizations should employ.

The recommendations are particular levels which conduce against the principles. Listed companies are anticipated of using these levels that as portion of their governance construction as well as procedures. Every recommendation is going with a review that strives to illustrate as well as help organizations in comprehending the recommendation (Anwar, 2012). The MCCG 2012 replaces the Malaysian Code on Corporate Governance 2007 (“MCCG 2007”). It introduces eight principles and twenty-six recommendations for good corporate governance that companies should employ.

All recommendation is followed by a commentary that gives guidance for performance. The MCGG 2012 uses and complements certain well practices of the MCGG 2007, and it else sets out fresh recommendations to reinforce Corporate Governance (Christopher, 2012). Under MCCG 2012, Principle 1 is to build up distinct roles and responsibilities. The accountabilities of the board, that ought to be exhibit in a Board Charter, consist of administration negligence, stipulating strategic path premised on sustainability as well as facilitating ethical execute in business communions (Anwar, 2012).

Recommendations

1. Indicates the board ought to build up distinct intentions retained for the board as well as those representatives of administration.
2. The board ought to build up distinct roles and responsibilities in arranging their committee as well as leadership intentions (MAICSA, 2012). New addition recommendation
3. Indicates the board ought to formalise ethical levels by code of conduct as well as assure its commitment (Christopher, 2012).
4. The board should formalize strategic policies which facilitate the company’s sustainability with specific concentrate on the environmental, social as well as governance fields of the business.
5. The board should have sequences to let their members chain to intelligence and recommend.
6. The board ought to assure it is stand through a becomingly eligible as well as capable company secretary (MAICSA, 2012). Newly added recommendation
7. The board ought to formalize, regularly appraise as well as cause public its board charter (Christopher, 2012).

Every new recommendations concerns for the range of responsibilities of the Board. It has been indistinct in many companies previously, thus the introductory of the Board Charter ought to take certain method to avoid the trouble henceforth. Not merely Board Charter to be grows under this recommendation, yet it also ought to be published. Modeling the Charter public is distinct signals which use to turn into a recommendation that may be applied later via shareholders as well as other stakeholders to determine the capability of the Board.

An amount of listed companies have fulfill of getting a formal Charter for certain period plus most would then provide acknowledgement to responsibilities in respect of ethics as well as sustainability, nevertheless, it is fine to notice the exercises formalized. The Code indirectly acquaints that in fields like ethics and sustainability, what organizations proclaim to rely in from time to time, referring to their annual reports, may be inaccessible eliminated from their practical conducts as well as doings In respects, under Principle 1, the commentary to Recommendation 1. n ethics comprises a motion that the Board ought to, “Assure the fulfillment of adequate internal systems to sustain, facilitate as well as assure their commitment. The code of conduct ought to comprise proper communication as well as feedback channels that promote whistle blowing” (MAICSA, 2012). Principle 2 is to reinforce construction which means the board ought to have clear policies and sequences which use to help in the raise of board members. The board ought to involve members who generate value to board cerebration (Anwar, 2012).

Recommendations of principle 2 included the board ought to build up a Nominating Committee (“NC”) that ought to involve exclusively of non-executive directors, a multitude of whom need to be independent. The NC ought to grow, preserve plus comment the standard to be applied in the recruitment procedure as well as annual assessment of directors. The board ought to build up formal plus clear remuneration policies as well as sequences to fascinate and keep directors (MAICSA, 2012). Principle 3 is to strengthen independence that is the board ought to have policies as well as sequences for assure usefulness of independent directors (Anwar, 2012).

Fresh addition recommendation

1. Indicated the board is stimulated to assume an annual assessment of the independent directors in the organizations based on provided criteria launched by the NC to evaluate the independence and objectivity of these directors. This assessment should be disclosed in the organization’s annual report as well as whichever notification for general meetings about the appointment as well as re-appointment of independent directors. Newly added recommendation
2. 2 is the tenure of an independent director ought not to surpass an accumulative requirement of 9 years.
3. On fulfillment of the 9 years, an independent director may go on to be engage on the board subject to the director’s re-designation as a non-independent director.

New recommendation

• 3 indicated the board need to explain as well as strive for shareholders’ consent in the case it preserve as an independent director, a person who has engage in that ability for over 9 years (Christopher, 2012).

While the new Code has commonly given legitimacy for its recommendations in the review parts, in respect of Recommendation 3. 2, it is not distinct the reason of the Code selects to single out the time taken as an independent director as the one independence subject to be prescriptive about. Another points of independence are in reality left to the organization itself during the code indicates, “The NC should grow the standard to assess independence. The board ought to use these standards on acknowledgement, annually as well as on whichever fresh benefit or relationship grows. ” That remains a lot of agility in determining exactly who is to be deemed independent, thus it is amusing to observe which the equal agility is not given for retention.

Nevertheless, for the organization which believes an individual or individuals used to maintain their independence even through 9 years, there is a type of an appeal sequences in Recommendation 3. 3 yet shareholders be able to give their consent to maintain the individual as an independent even over 9 years (MAICSA, 2012). Principle 4 is about cultivate compliance where directors should dedicate enough time for conduct their responsibilities, frequently upgrade their wisdom as well as improves their technical ability (Anwar, 2012).

New recommendation 4.1 indicated the board ought to provide expectations on the time compliance for its members to conduct their responsibilities. This compliance ought to be received at the period of appointment. Furthermore, the board also ought to provide agreements for directors accepting new directorships. Moreover, ongoing education programs should be launched by the board with opinion of assuring directors improves their skills and wisdom (Christopher, 2012).

For formulating these, the board should be directed by feedback from its management and industry best practices. Another newly added recommendation 7. 2, the board ought to stimulate the organization to leverage on intelligence technology for predominant distribution of intelligence involving devoting a section on corporate governance on their website (Christopher, 2012). The new additions Code verify the essential of appropriate and well-timed intelligence in shareholder decision making as well as the recommendation for the better utilize of technology is due to the requirement for better well-timed intelligence.

Nevertheless, these recommendations do not go as possible as was anticipated via the Blueprint, specifically in the part of non-financial data. Here one requirements to remember that the Code is piece of a jigsaw of Corporate Governance demands in Malaysia. Under disclosure, Bursa Malaysia published a Corporate Disclosure Guide in September 2011, that unexpectedly leave a lot further involving the requirement of disclosure on non-financial data (MAICSA, 2012). Principle 8 is about to reinforce relationship within company and shareholders where the board ought to promote the use of proprietary authorities by shareholders (Anwar, 2012).

Companies are stimulated to apply electronic methods for poll voting (Christopher, 2012). While the last recommendation 8. 3 is the board ought to facilitate predominant communication and vigorous operations with shareholders (MAICSA, 2012). The review of 8. 2 recommends that, “The chairman ought to notify shareholders of their authority of require a poll vote in the beginning of the general meeting. ” The reason regarding this recommendation was good illustrates in the Corporate Governance Blueprint, “Most resolutions adopted at general meetings are voted on raise hands as objection to poll voting. This voting behavior is presented as unjust for shareholders because it does not stand for the shareholding standpoint of the specific shareholders.

If voting is done via raise hands, every shareholder physically present holding each vote, while voting via poll offered for under section 55 of the CA provides consequent to the principle of ‘each share each vote’. Virtually, this recommendation is a good procedure to enhance shareholder authorities (MAICSA, 2012). The MCCG 2012 complements the recommendations under MCCG 2007. The MCCG 2012 introduces Corporate Governance exercises that expand over which adjusted by law.

These recommendations are according to the desire which the boards of directors and shareholders of organizations ought not to pursue just to attain financial competitiveness, yet should else pursue to stimulate ethical exercises and sustainability of their organizations. Powerful corporate governance is essential for business success and linchpin to gaining investor confidence in a market. Through and large the MCCG 2012 improves the culture of corporate governance for corporate Malaysia.

However, the cooperative effort of all stakeholders is necessity to support the drive to enhance corporate governance to the aspiration levels moving forward.

References

1. Christopher Lee, The New Code on Corporate Governance 2012, accessed 25 May 2012, available at < http://www. christopherleeco. com/wp3/? p=879>
2. IJM Corporation Berhad, Annual Report 2012, accessed 17 May 2012, available at <http://www. bursamalaysia. com/market/listed-companies/company-announcements/#/? category=all>.
3. MAICSA, 2012, New Malaysian Corporate Governance Code 2012, accessed 25 May 2012, available at < http://www. maicsa. org. my/article_coverstory/2012/article_coverstory_1204. aspx>
4. Mallin, C. A. , Corporate Governance, 2nd edition, Oxford: Oxford University Press, 2007.
5. Monks, R. A. G. and N. Minow, Corporate Governance, 3rd edition, Oxford: Blackwell Publishing, 2004.
6. OSK Holding Berhad, Annual Report 2012, accessed 17 May 2012, available at <http://www. bursamalaysia. com/market/listed-companies/company-announcements/#/? category=all>.

There are many taxpayer supported medical schools in this country, most receiving their fees for services through Medicare and Medicaid. The Department of Health and Human Services requires that medical students who have graduated to the resident status have a teaching physician physically present when performing key portions of patient service to be able to bill those services to Medicare. In fact, the patient chart must be legibly signed by the attending physician that they were present and supervising the specific service in order to bill Medicare (“Guidenlines for teaching,” 2011).

According to an article in the Dallas News, a former employee by the name of Jack Mooney was hired in 1991 by the University of Texas Southwestern Medical Center as a reimbursement manager to make sure that all medical billings submitted to Medicare and Medicaid were properly documented and billed (Dunklin & Moffeit, 2010). For example, that the teaching physicians were physically present when residents were performing services to meeting the required mandates for Medicare billing. He discovered that was not the case and took the information to his supervisors.

Stricter policies were put into place for the departments to follow to make sure that all employees were following the necessary guidelines. In 1997, when Mr. Mooney was the director of UT Southwestern’s billing compliance office, he was still seeing and documenting the same problems. Mooney left the college in 1998 shortly after filing a federal whistle-blower lawsuit. The earliest documentation that can be found of UT Southwestern’s Internal Audit departments involvement comes in a 2003 when they approve of some of the college’s compliance policies, but noted that they do not have a policy in place to review reimbursement claim documents.

Dallas News notes that six faculty meetings were held during 2007 and 2008 in which billing concerns were discussed. The Internal Audit Annual Reports for those years do not report any ongoing audits, but do report that they provide the billing compliance committee “independent consultation and guidance to help billing compliance activities address institution risks” (Rubel, 2008). In 2010 we finally see an internal audit performed of UT Southwestern’s billing compliance programs. The report stated that “the audit identified a significant finding in the Hospital Billing Compliance program”.

As of 2010, the program had not yet implemented the 2005 Department of Health and Human Services, Office of the Inspector General (OIG) Supplemental Compliance Program Guidance for Hospitals. Although this guidance is voluntary, it is highly recommended by the OIG to help hospitals in “preventing the submission of erroneous claims and in combating fraud and abuse in the Federal health care programs (“OIG supplemental compliance”). The guidance specifically states that “hospitals should have in place procedures regarding resident rotation and monitoring”.

The audit report recommends that the compliance program implement the OIG guidance, consolidation of the billing compliance groups (there are currently four), development of a single risk assessment plan with a corresponding audit plan, a monitoring system for both the risk assessment audit plan and the billing compliance audit report. Also of note in the audit report are repeated failures by the same department to meet billing practices. It is noted that these “recurring systematic failures increase the risk of exposure to potential civil damages and penalties, criminal sanctions, and administrative remedies, such as program exclusion”.

The audit recommends that the failures be addressed at the department level and to develop a formal training plan to improve billing compliance. According to the report, all significant findings are tracked by the University of Texas System Audit Office to make sure that all agreed upon recommendations have been implemented. These reports are unavailable for review and there has been no further comment on the billing compliance audit in the 2011 Internal Audit Annual Report. This issue was first brought to light 20 years ago by someone that was hired to review billing compliance.

We know that 7 years ago the internal audit department was aware of the issue, but as far as we can tell, no significant audit of the hospitals billing department, in relation to Medicare billing requirements, was completed until 2010. Was the hospital fraudulently obtaining money from the government? Not in so far as anyone has determined. Was the audit department aware of the issue? Yes, as far as we can tell. Did the internal auditors follow the IIA’s mandatory guidance? Yes in the completion of the audit in 2010 but it is my personal opinion, given the facts provided, that the audit should have been ompleted years earlier. ?

References Department of Health and Human Services, Centers for Medicare & Medicaid Services. (2011). Guidenlines for teaching physicians, interns, and residents. Retrieved from website: http://www. cms. gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNProducts/downloads/gdelinesteachgresfctsht. pdf Department of Health and Human Services, Office of Inspector General. (n. d. ). OIG supplemental compliance program guidance for hospitals (Vol. 70, No. 19). Retrieved from website: http://oig. hhs. gov/fraud/docs/complianceguidance/012705HospSupplementalGuidance. df Dunklin, R. , & Moffeit, M. (2010, May 30). Feds probe alleged fraud at ut southwestern, parkland. Dallas News. Retrieved from http://www. dallasnews. com/news/community-news/dallas/headlines/20100530-feds-probe-alleged-fraud-at-ut-southwestern-parkland-. ece Rubel, R. (2008, November 03). Internal audit annual report fiscal year 2008. Retrieved from http://www. utsouthwestern. edu/media/footer_required_documents/audit-2008. pdf Rubel, R. (2010, February 24). Billing compliance audit report. Retrieved from http://res. dallasnews. com/localnews/responsivedocs_audit_2010. pdf

This paper describes the case of Olympus, a Japanese manufacturer of optic equipment, at which in early 2012 a scandal was uncovered which was soon dubbed to be one of the largest loss-concealment schemes of . In the 1990’s, Olympus incurred significant losses on financial investments made. These were subsequently hidden with the aid of investment companies by shifting the investments around. In the 2000’s, these losses were to be repaid by paying exorbitant merger and acquisition fees to these investment companies.

After newly-appointed CEO Michael Woodford blew the whistle on these frauds, the company got into trouble. Our research into the events leading to this scandal, as well as an of the internal control environment led to some interesting insights regarding possible improvements Olympus might implement. However, we also note that a collusion of board members cannot be prevented by any level of internal control, and a renewal of the entire board might be appropriate in order to establish proper internal control within the Olympus Corporation. Table of Contents

Table of Contents2 Chapter 13 1. 1Description of the organization of Olympus3 Organization3 Strategic Analysis3 Management Structure4 1. 2The Olympus Scandal5 Background6 Tobashi Schemes6 Whistleblower7 Legal Actions9 1. 3Analysis of the events9 Chapter 211 2. 1Evaluation of and recommendations for the control environment11 Organizational Structure11 Board of Directors and Audit Committee12 Management Philosophy and Operating Style13 of Authority and Responsibility15 Human Resource Policy and Practices16 Integrity and Ethical Values17 Commitment and Compliance18 . 2Recommendations for control activities19 Chapter 320 3. 1Conclusion20 Literature Used21 Appendix23 Chapter 1 1. 1Description of the organization of Olympus The organization which we will be discussing in this paper is Olympus, which is a Japanese company specialized in optical and digital products. Most people will know Olympus from the cameras they make, but they produce a lot more different type of products. This chapter will cover the background of Olympus and a strategic analysis of the company. Organization Olympus was established in 1919 in Tokyo, Japan.

At first they specialized in microscopes and thermometers, but in 1936 they introduced their very first camera, the so-called Pen. It is this product for which they are well-known to the public. Nonetheless, it is not their primary product. Olympus is extremely specialized in microscopes and optics. Most of these are used in professional environments, like research centers and hospitals. This links also to another specialty product of Olympus, namely medical equipment. Olympus is an important manufacturer of endoscopic, and disinfection equipment.

These medical are used worldwide (Olympus Corporation, 2012b). Olympus is even market leader in the endoscopy market, with a market share of almost 70%. Of the net sales of Olympus, 42% are from the medical systems segments. According to the annual report, Olympus operates worldwide, with about 46% of the 2011 fiscal sales from Japan. Other main areas are North America (21,5%), Asia (not including Japan) with 11,5% and Europe with 18,2% (Olympus Corporation, 2011a). Strategic Analysis It is clear that Olympus is a multi-business entity which follows a related diversification strategy.

They operate in several markets, namely ‘medical’, ‘life and industrial’, ‘imaging’ and ‘information and communication’. All these areas require a lot of research and development, but there sure are operational synergies between these markets. Logically, the lenses they use in cameras are also very useful for the medical equipment. In the Annual Report of 2011, Olympus states that the two businesses it wants to focus on most are the ‘endoscopes’ and ‘surgical and endotherapy devices’. Olympus is already market leader in the first category, creating unique, high-resolution equipment.

For the second category Olympus is still broadening its market share. An important step in this process was the acquisition of Gyrus, plc in 2005. Later on we will see that the acquisition of this U. S. endoscope company has played a very important role in the fraudulent activities of Olympus. In 2011, Olympus had about 34,391 employees. This number had been decreasing for a while, since in 2009 they had 36,503 employees. But not only the number of employees has decreased in the last few years. Net sales declined in 2011 to ? 847,105 million (about $10,589 million).

Operating income declined to ? 35,360 million, about $442 million (Olympus Corporation, 2011a). The development of the results of Olympus in the past few years are shown in these three graphs below: [pic] Figure 1: Olympus Financial Results (Source: Olympus Annual Report 2011) Management Structure In the Annual Report of 2011, it is stated that Olympus values an appropriate corporate governance structure from a global perspective. They adopted a corporate structure with an auditor system based in the Japanese Corporation Law.

The corporate governance systems consists of a Board of Directors of 15 members, which audits and supervises the performance of directors, and a Board of Auditors consisting of 4 members, which are independent from the Board of Directors and audit the performance of the directors. Two external auditors are members of the Board of Auditors, and also of the Special Committee, which gives advice to the Board of Directors. An interesting fact about the composition of the Board of Directors is that is has always fully consisted of Japanese directors, until April 2011, when the first non-Japanese director was appointed.

Because there are a few important and recurring people in this scandal, it is important to know their names and position in the company. Tsuyoshi Kikukawa – Chairman of the Board of Directors and CEO Michael Woodford – President of the Board of Directors and COO Hisashi Mori – Director, Executive Vice President Hideo Yamada – Standing Corporate Auditor This is how the positions of the main were halfway April 2011, right before the suspicions of the fraud would rise (Olympus Corporation, 2011a). The management structure of Olympus can be visualized as follows: [pic]

Figure 2: Olympus Management Structure (Source: Olympus Annual Report 2011) In the Corporate Governance Structure Chart above, some aspects of the Internal Control System can be found. We will discuss this explicitly in Chapter 4. But for now it is enough to know that Olympus has a CSR Commission chaired by the president to set up and evaluate targets with regard to CSR activities. They also have an internal employee code of behavior the so-called Olympus International Standards, and they established a Compliance Department which in case of compliance problems has to report the problems to the Board of Directors and the Board of Auditors.

For the Risk management system, the company has established a Risk Management Committee which helps to decide on risk management policies and the evaluation, verification and procedural standards to respond to such risks. In order to reduce the risk of takeovers, they have introduced a plan to prevent large-scale purchases of the company’s shares. The anti-takeover measures are advised on and evaluated by the Special Committee, existing of the two outside auditors and one outside director (Olympus Corporation, 2011a). 1. 2The Olympus Scandal

The scandal surrounding Olympus became known on October 14th, 2011, when Micheal Woodford was fired as the CEO of Olympus. He had been the CEO of Olympus for only two weeks. He was the first non-Japanese person to become a member of the Board. In a press statement, Olympus announced that they had fired Woodford because of differences in management style. But according to Woodford, that was not the actual reason. He stated that Olympus had fired him because he questioned some prior acquisitions. This was not something of the most recent years, in fact, the scandal even goes back to the nineties. Background

It all started of the nineties. A decade earlier, the dollar was almost worth ? 250 (Board of Governors of the Federal Reserve System, 2012). Due to this undervalued yen Olympus suffered from an enormous operating loss, as imported resources were incredibly expensive. To solve the problem of the extremely undervalued yen, a few countries decided devaluate, and after the implementation of the Plaza Accord in 1987, a dollar was worth about ? 121. The Japanese export market was still expanding, though one can wonder whether it even was a real market, it was actually more a bubble.

In the final four years of the 1980’s the stock prices tripled. Many Japanese companies, like Olympus, used speculative investments to boost their income, which was very welcome because of the declining income from normal business due to declining exports. These risky investments worked until 1990, when the Japanese markets collapsed. In that year, Olympus decided to cover the loss of ? 100 billion ($730 million). The reason why such an enormous loss could be hidden was because of the rules in Japan around that time. Investments could be carried at costs.

Olympus simply did not write down on the investment, which was worth nothing anymore. They hoped that they could make up for the losses by doing more risky investments. But after a few years, instead of making up for it, the losses only got worse. And then in 1997, the accounting rules changed. Investments had to be marked to market and Olympus now actively had to do something to solve the problem of the losses. And it is this very moment when the real fraudulent practices of Olympus started, to cover the losses of the last decade of the twentieth century.

Tobashi Schemes It was much more difficult now to hide the losses for the public. Hideo Yamada, in that time a former full-time auditing officer at Olympus, was the chief of Olympus’ general affairs and financial department. He consulted, together with his subordinate Hisashi Mori, two officials of an consultancy firm. Together they decided to hide the losses with a Tobashi scheme. They transferred Olympus’ losses to some funds they had established right before March 1998 at the Cayman Islands, named Quick Progress and Central Forest.

These companies were not consolidated with the Olympus’ financial statements, so such assets transferred there would not show up on Olympus’ balance sheets. By the assets for only short amounts of time, right before the financial year ended, they managed to keep these assets hidden for several years, including the losses they were incurring on them. Additionally, rumors are that Olympus reported several non-existing foreign bank accounts in order to conceal it’s usage of fake transactions. Additionally, several of these loss-incurring investments were moved to Axes America and it’s Cayman Islands-based subsidiary AXAM Invest Ltd.

Signs of the fraud came to light when Olympus wanted to pay back these losses to AXAM by hiring them as consultants for the takeover of Gyrus. For this takeover, AXAM was paid an exorbitant fee totaling $687 million. This consisted $67 million in cash and another $177 million in preferred shares, which Olympus repurchased two months later for $620 million. This repurchase of shares also increased the goodwill on Olympus’ balance sheet by $435 million (Woodford, 2011). Gyrus was not the only dubious acquisition of Olympus.

Throughout the years they had acquired many companies, most of the time for a very high price or by paying exorbitant fees to consultants. Another example is the acquisition of Altis, Humalabo and News Chef. Between May 2006 and April 2008 Olympus acquired the majority controlling interest in these three companies. They paid approximately $773 million for the companies (? 73,419 million). The purchases were completed in April 2008. In the same fiscal year, ending in March 2009, the investment in these three companies was written down as follows: [pic]

Figure 3: Altis, Humalabo and News Chef impairments (source: Letter from Woodford to Olympus Board, 2011) So the total investment in Altis, Humalabo and News Chef was almost $800 million, but within a year is was written down with almost $600 million to only 25% of the original value. This is of course an extraordinary goodwill impairment for such a short amount of time (Woodford, 2011). Whistleblower In April 2011, Michael Woodford became the first ever non-Japanese president and Chief Operating Officer (COO). October 1st 2011 he also became CEO of Olympus, replacing Kikukawa in that position.

But within two weeks, October 14th, he was fired as CEO of the company. The Japanese Board stated that is was because of the differences in management style, that Woodford as an Englishman could not really understand the Japanese business culture. Woodford himself stated that the story told by the board was not true. According to him he was fired because of the fact that he investigated the M&A fees of several acquisitions, especially the acquisition of Gyrus (Voigt, K. , January 2012). Woodford started questioning some of the M&A fees paid after he read an article in FACTA on July 30th about a dubious acquisition by Olympus, namely

Gyrus. Upon this he contacted Kikukawa and Mori and demanded answers about the fees paid. He wrote several letters, explaining his concerns about the governance issues, but he never got any real answers. He threatened to resign if he did not get an about the M&A fees. Little later, he was named the new CEO of the company. Understanding quickly that this promotion was only done to silence him, he hired PwC to investigate the fees without informing the board about this investigation. After the report of PwC was completed, Woodford sent the report to the Olympus Board and to Ernst&Young, auditors of Olympus.

On an emergency board meeting on October 14th he was dismissed (Bacani, 2011). The directors of Olympus denied the accusations of Woodford for a few weeks, even blaming him for the decline of the stock price. On October 26 Kikukawa resigns as CEO and president, and he is replaced by Shuichi Takayama. In the week of 6 November 2011 president Takayama made public that he had been informed by the now-dismissed Mori about the cover-up schemes. He explained that he had known absolutely nothing about these schemes and that Kikukawa, Mori and Yamada were not responsible for the initial losses, but had only tried to hide the losses.

Yamada, the auditor of Olympus, had resigned a week earlier. One week after Woodfords firing, on October 21st, the stock price of Olympus had fallen from $32 to $16. The chart below makes clear that the stock price would drop much further. In the week of 6 November, when Olympus admitted the fraud, the stock price declines to $6. 3 per share. The scandal caused the stock price to drop with almost 80% (Yahoo Finance, 2012). [pic] Figure 4: Olympus Stock Price (Source: Yahoo Finance) Legal Actions Of course, these types of fraud with such an impact cannot go unpunished.

In February 2012, seven men were arrested for the fraud, including Kikukawa, Mori and Yamada (CNN Voigt, February 2012). They were arrested on suspicion of filing false financial statements to cover up the enormous losses from the past in 2006 and 2007. Kikukawa is seen as the main suspect in this case. Separately from these accusations, the company Olympus as an entity is also charged for the falsification of the financial statements. Later on, four of the seven men were rearrested for falsification in other years, namely 2009, 2010 and 2011 (Hasegawa, 2012).

Japanese lawyers have said that the executives can face up to ten years in prison or a fine of about $125,000. If found guilty, the firm faces a fine of almost $9 million. The trial of the Olympus officers has not started yet, so it cannot be said what the final judgment will be (Reuters, 2012). On April 20th 2012, investors approved of a complete new Board of Directors, hoping that the company now can start with rebuilding its image and shareholders’ trust, and that they can finally leave these rumorous years behind (Olympus Corporation, 2012). 1. 3Analysis of the events

Already in 1986, the then-CEO said to press that “in , companies will have to use financial in order to make a profit”, referring to the use of Tobashi-schemes to hide incurred losses or even inflate profits. In the Japanese investment climate at the time, there was little regulation on this “flying away” of losses incurred on bad investments, and it was in fact even popular in the ‘80’s, with certain production companies come to be nicknamed banks because their financial incomes exceeded their operational incomes (Dymski & Isenberg, 2002).

This was made possible by the so-called zaitech (literally: financial engineering) system which was caused by the extremely low interest rates and high accessibility of credit, which made it easy for companies to raise money to invest in speculative market activities. This led to an upward spiral of increasing stock prices, enabling companies to obtain more capital, perform more risky investments, which again led to a increase in stock value enabling the companies to report more (speculative) profits, which closes the circle by increasing the company value and enabling them to obtain more capital (Haramis, 2007).

Another factor contributing in this was that a lot of these securities issued were convertible bonds. Japanese investors customarily did not take into account the possible dilution of shares caused by convertible bonds, and thus the emission of convertible bonds did not cause a decline in the price of shares (Smith, 1994). Even if the zaitech would lead to a loss, the system of Tobashi would make it possible for firms to hide the losses. With Tobashi, the investment houses could reimburse the losses to their clients in loan-like constructions which would eventually need to be repaid.

These loans often involved moving the loss-giving assets into special purpose vehicles (SPV’s). These SPV’s had non-synchronous financial year-ends, allowing the losses to be kept off the books by moving around the assets. The feeling of being unable to lose was also reinforced by investors. This is described as follows:“[…] the Bureau instructed firms to postpone the introduction of lower cost accounting until April 1, 1988. Because of this, companies did not need to write down the loss and life-insurance companies did not have to sell stocks in mass quantities.

In this way, the MOF succeeded in preventing share prices from declining. After that, stock prices surged remarkably. This was because these measures by the MOF to contain the markets made investors believe that the ministry would never let stock prices slump. ” (Kamikawa, February 2010) It was not until the end of 1989 that the Japanese government interceded in this bubble by raising the interest rates, which ultimately led to the collapse of the zaitech-bubble and eventually even the 1990’s recession in Japan (Smith, 1994). Olympus partook in this as well in the 1999’s by hiding the ? 0bn ($241mln) losses incurred while investing in a venture capital fund in 1999 owned by investment house Nomura. One of the owners of Nomura was Nobumasa Yokoo. This loss never showed up in the financial statements, but was uncovered during investigation by external audit firm PwC, which was hired by whistle-blowing director Woodford. ‘Coincidentally’, Yokoo was also shareholder in 3 companies (News Chef, Altis and Humbalabo) which Olympus acquired in the 2007 – 2010 period for ? 73. 4bn. Only 6 months later, these were impaired by ? 55. bn (75%) because “the business prospect diverged from the assumption at the time of investment”. Investigation into these investments is yet to be launched officially, but suspicions are that this is also another attempt at repayment for a Tobashi scheme. Chapter 2 2. 1Evaluation/recommendations for the control environment The control environment is an essential part and basis for the internal control system within a company. A firm may have enhanced control activities and monitoring procedures but without properly established control environment all the control component would be futile.

In 1992 COSO released their Internal Control – Integrated Framework, which states that control environment “sets the tone of an organization, influencing the control consciousness of its people” (COSO, 1992), provides foundation for other components of internal control. Control environment includes integrity and ethical values, commitment and of the company’s personnel, Board of Directors and Audit Committee participation, management philosophy and operating style, organizational structure and human resource policies, assignment of authority and responsibility by management.

In 2004 COSO published Enterprise Risk Management – Integrated Framework, which expands on internal control and focuses more on enterprise risk management. Framework contains definition of internal environment, which “encompasses the tone of an organization, and sets the basis for how risk is viewed and addresses by an entity’s people” (COSO, 2004). We will address the elements of the control environment and internal environment to the Olympus case under investigation using the seven principles for control environments as guidance (Streng, 2011).

Alongside an evaluation addressing these elements, we will give our recommendations for improving them. Organizational Structure Evaluation The Olympus Corporate Strategic Plan slogan which is actively promoted within the company is “Advancing to the Next Stage ” (Olympus Corporation, 2010). Based on this slogan the company rejuvenated its management structure in April 2011 by introducing new management rules, restructuring information-related operations and administration, shifting focus to overseas operations and reviewing the cost structure.

These changes can suggest the considerable flexibility of the organization in following the chosen strategy. The overall organization structure described in the part about “The Board of Directors and Audit Committee” seems quite elaborate for such kind of company as Olympus. Information about the key managers’ responsibility cannot be found in the public sources; therefore we cannot evaluate how adequate they are and whether managers have a proper understanding of them.

Nevertheless, this organizational structure which seems to be thoroughly established did not prevent the fraud, because of the involvement of almost all top officials in it – 19 people were sued in covering-up losses and some of them are still the part of the firm’s management (Buerk, 2012) Recommendations The basics of internal controls are all there in Olympus, with collusion being the main reason why the fraud could continue for so long without any detection. The new management rules which were implemented in 2011 were a good start, were it not for that the board did not follow the newly implemented rules themselves.

Best would be to completely remove any ties between the internal auditors and the board, so that the internal auditors can audit the board more effectively and without interference by executives. In a construction like this, the internal audit department would only have their responsibility to the general meeting of shareholders, preventing possible future collusion. Board of Directors and Audit Committee Evaluation The corporate governance structure of Olympus consists of two organs.

The first of these is the Board of directors, which meets frequently and is tasked with supervising and auditing the performance of executives and internal auditors. The second is the Board of auditors, tasked with the audit of the performance of the executives and advising the board of directors. The division between executive and non-executive directors is an important internal control procedure in enhancing the separation of duties for monitoring and decision-making, and should increase independence between the board and management.

The general meeting of shareholders has the final decision on the appointing of directors, internal and external auditors and remuneration, ensuring a separation of duties. The remuneration of directors is based on their performance, which is measured by the balance score card (BSC) system on the degree to which the goals are achieved in four dimensions (financial, customer service, business operation process, growth potential). Concerning the knowledge and expertise of directors, we can conclude that, based on the publicly available information, the directors of the company are highly qualified and experienced.

Also this conclusion can be confirmed by the resumes of the directors, who have all been involved with the company for a significant number of years, often a majority of their lifetime. This can however also be a , because they may miss a fresh view on the company. The Olympus scandal showed existence of strong ties and cooperation between the Board of directors, banks, investment bankers and accounting firms in conducting fraud and their attempts to hide it (Yasu, 2012). Proper control environment should include directors who are independent from management, trade partners and other parties (Maitland, 2012).

Recommendations In the case of Olympus the chairman of the board of directors was the same man as the CEO. We think this is a part of getting a huge scandal like this one. The Board of directors should determine whether or not the CEO is independent in character and in judgment (Financial Reporting Council, 2010). But in Olympus, the chairman of the board would therefore be required to evaluate himself on his own independence, character and judgment. Seeing as this is impossible the UK CG code proscribes a segregation of duties between these two positions.

Even though this would not directly apply to Olympus operating under Japanese law, it is very probable that the Japanese CG code also at least an advice for this. Thus we would recommend for Olympus to have two different independent people fulfilling these functions. Furthermore we think that the people within the board and people with other top functions were too long holding the same position at the company. This makes the board less independent and will make the chance of fraudulent actions higher, even when some executive people left they came back at the company in another function like Kikukawa did.

Kikukawa was first the CEO and president of the board, and returned as an auditing officer after his dismissal. This led him to be able to review his own work as CEO. We recommend that Olympus reassigns its board members and that people within this board should not have other important functions for at least several years. The UKCG Code advises for board members not to stay on for longer than 9 years (Financial Reporting Council, 2010). This makes it harder to perform fraudulent actions because people can’t rely on the new people to participate in the fraud. This will also more often give shareholder control over the actions of the board.

Additionally, they cannot get “rusted into ”. However, as the entire board, including non-executives, and the internal auditors were involved in the fraud scheme, we have doubts whether any amount of internal control could have prevented this fraud. Management Philosophy and Operating Style Evaluation In this section we will pay attention to the management philosophy, including risk attitude and management approaches. The Olympus Corporate Social Responsibility (CSR) Report 2011 gives us insight into which management insights considers the most important for the company.

It is stated that for the company the main focus is not on the profit but on the “win-win relationships” with stakeholders based on mutual trust. Management philosophy in the company is based on “Social IN” through which company incorporate social values into the company’s activities. (Olympus Corporation, 2011b) The CSR Concept of the Olympus Group establishes the ways in which the company can make its contribution to society (through business and other voluntary activities) and states the company’s duties responsibilities to society through compliance with laws, regulations and business ethics.

Olympus not only states their views on how the business should be conducted but also communicates them but means of policies. For example, to act on behalf of the customer the company established Protection Policy; with respect to human rights the and Labor Policy was implemented. These policies and philosophies are incorporated in the daily business activities. All the means and processes mentioned above create an impression that the Olympus Company has a strong attitude towards corporate values and uses strictly stated procedures to bring them into everyday business life.

Olympus established a system of committees to employ more comprehensive approach towards risks and to analyze, evaluate and manage them (see Figure 2: Olympus Risk Management System on the next page), such as a Risk Management Committee (to decide on the risk management policies and on proper responses for the risks faced by company, chaired by the president), a Risk Management Bureau (to collect and evaluate information regarding risks, to develop counter measures and ensure their effectiveness) and a Business Continuity Plan (to ensure devotion to its management policy in emergency cases, to be prepared to such cases).

Recommendations However, despite all these internal controls, the fraud still managed to occur and persist through collusion of the board of directors. Not any amount of internal controls would be able to prevent such a fraud, as the board can always override these controls. This can especially be seen in Figure 6, where the president is depicted as the Risk Management Leader, all the while it was the president who was the center point of the fraud. However, one can limit the options for fraud by non-executive management significantly.

The processes and policies established by Olympus already give a good head start, but of them is support by management. Not in word, but also in deed. Every in-house department and affiliate company should establish its own risk management structure and all the uncovered significant risks should be immediately reported to the president and Risk Management Committee. [pic] Figure 6: Olympus Risk Management System (Source: Olympus CSR Report 2011) Assignment of Authority and Responsibility Evaluation

The company established a thorough corporate governance system with stringent monitoring, auditing, evaluating and reporting responsibilities. There are various committee structures ensuring compliance and effective internal controls in all the business activities and a lot of attention is paid to compliance with norms, laws and regulations. The Boards of directors plays an important role in establishing of company strategy, about main and monitoring the fulfillment of decisions made and strategies established, while leaving the day-to-day management to the company managers.

A special Committee, consisting of outside directors and auditors, takes advisory responsibility concerning the most important deals. Public sources do not provide information about the employee job descriptions, therefore in it hard to evaluate thoroughly appropriateness of the responsibility assignment. The firm documents also do not contain the information regarding the number of people with respect to data processing and accounting functions, which also does not allow us to get a better grasp on the actual situation within the company. Recommendations

The company already has developed a thorough corporate governance system with stringent responsibilities. There are still some recommendations like competency controls. This is a formal control since it verifies whether organizational activities are conducted in with applicable procedures and requirements (Vaassen, Meuwissen, & Schelleman, 2009). So these controls can be used to prevent unauthorized employees gaining access to certain areas or assets they should not supposed to have access to. For these competency controls to work correctly strict procedures and requirements have to be well formulated and established.

We therefore recommend Olympus to have strict procedures and have competence controls using these procedures. For responsibility we think it is important for Olympus to have clear function descriptions in which the responsibilities for that particular function are described. Human Resource Policy and Practices Evaluation The Olympus Corporate Social Responsibility Report 2011 states that human resource management systems are based on the belief that a company’s performance consists not only of its business results but also of the growth gained by each individual employee.

The company established a thorough Human Rights and Labor policy stressing the most important issues in this area and developed a CSR Educational Cube (see right) to raise awareness of compliance, CSR initiatives and enhance communication within the organization. The company introduced various initiatives concerning HRM including internal job-seeking, individual , skill development, newly appointed executives trainings, occupational safety programs, physical and consultations, and a so-called ‘Welfare Cafeteria Plan’.

All of these activities serve the goals of enhancing employees performance and their commitment to the company. Concerning the reward systems, there are established procedures for annual paid holidays and bonuses. Company CSR Report states that salaries and bonuses reflect each individual’s activities and contributions; the bonus funds are linked to business results. Company also use a so-called Advanced Technician/ Incentive System to ensure improvements of the technical and practical skills of and serve the innovation basis for the company activities (Olympus Corporation, 2011b).

Recommendations Vaassen et al, 2009, p. 203, Describes that Human resource management processes generally consists of recruiting and selecting employees, educating and training employees, assigning tasks to employees, evaluating employee performance, employee remuneration and employee termination. Some of these aspects can be found at Olympus but not all yet. An recommendation on this part is that for each employee there is a personnel file available.

This file will consist of data of the employee right before starting at the company such as address, number and contract information, but it is also important to keep this file updated with the employee performance, evaluation, payroll and career advancements. Also when the employee participates in education and training programs this needs to be included. This file needs to be available to managers because managers can use this file to assign tasks to their employees. Another recommendation to Olympus is to evaluate their employees on a regular basis.

This evaluation needs to provide feedback to the employee about their job effectiveness and career guidance, because this will motivate the employees. This evaluation needs to be done by the functional manager together with the human resources manager. Then finally it is important for Olympus to have procedures in place for terminating dysfunctional employees. When during the evaluations turns out that the employee is not performing as it should be, there needs to be a plan for improvement made by the superior of the employee and the human resource manager.

This plan needs to be communicated to the employee. After this the two officers needs to monitor the employee to see if there is improvement. Integrity and Ethical Values Evaluation The Olympus scandal, and even more the scale of it, points out that ethical values are very important for companies. It is not enough to just have a code of conduct or an ethics committee. The company should also live to the ethical guidelines. And if even the directors do not behave ethically, how could they expect the employees to behave ethically? In theory Olympus has done a on the ethical part.

They have got several codes on ethical behavior and moral values and there is a committee about this. But just the existence is not enough. It is clear that there was no correct ‘tone at the top’. It could be recommended to start at the top of the company, because once the directors show moral and ethical behavior and give guidance to what is right and wrong, the employees might act the same. Recommendations Part of the board of directors was replaced, but several key figures are still in place after the scandal, even though it is known that they were (or should have been) aware of the fraud going on right in front of them.

We would therefore recommend that the remaining directors are also replaced, which would give a good signal to both shareholders and employees alike that it’s time for a fresh start. It is also important that the attitude to mistakes or misbehavior is reasonable. Of course, the effects of a mistake may be huge, but the reaction to it must be reasonable. Otherwise, people will try to hide their mistakes. Especially in a business culture like the one in Japan, this may be very hard to implement, because it is considered discrediting the company if one makes mistakes or causes significant losses.

As such there must be clear and reasonable consequences to misbehavior or overriding established controls in order to diminish the amount of secrecy around losses, mistakes or ethical misbehavior. Furthermore, the code of conduct and the ethical and moral values should be known and implemented. Not only the employees, but especially the directors should be aware of it and behave as demanded, to set an example and prevent scandals like this. Commitment and Compliance Evaluation Overall Olympus developed a thorough approach for recruitment and promotion.

They established company Human Rights and a Labor Policy and requires from all the employees high commitment to company values. To promote the company values, Olympus holds meetings with their employees and gives trainings to the employees. This can be seen in the Corporate Social Responsibility Report of 2011 which contains methods for developing a culture based on putting the customer first. To achieve this Olympus has chosen to instill the attitude of thinking from the perspective of the customer in every employee by providing special courses at all the levels in the company including newcomers.

So Olympus facilitates skill development (Olympus college, Advanced Engineer Incentive System) to equip their employees with the skills they need to work successfully. At the company group level a Safety & Health and a Ethical Conduct Promotion Committee was established to enhance safety & health and to reduce ethical problems for all the employees within the group. Recommendation Olympus already does a lot to promote their company values as described above. Also by meetings with the employees the commitment will be better.

For commitment it is also important to have good guidance by superiors, therefore our recommendations on this part are similar to the ones of human resource policies. Something that can be added in this part is that programs employees can perform are specially for those employees, so the programs needs to fit with the employee and their career changes. This will make the employee more committed to the company. 2. 2Recommendations for control activities

In this paragraph we will assume that all the recommendations for the control environment has been taken into account and that Olympus has implemented those recommendations. Now we will look at recommendations for the control activities. We first need to know what control activities are. According to Streng, 2011, p. 49: ” Control activities are the formal policies and procedures that help an organization ensure that objectives are being achieved and are achievable. The scandal started with speculative investments which caused a loss of $730 million.

Therefore Olympus should implement control activities to ensure that this cannot happen again. First of all the company should not invest in investments that are riskier (too speculative) than they prefer. They have to decide for themselves what their risk appetite is and cut out the investments that are too risky. To make sure that such investments will be left out, Olympus needs a risk assessment report for the investment. This report needs to be approved by the management which will make the investment, but also by the higher management of the company.

This will make the chance of big losses smaller. Thereby comes the fact that segregation of duties is important. The scandal was caused because higher management approved or even initiated very risky investments, so there must be someone independent to check on the investments. After having the investment approved the investment still needs to be monitored on a frequent basis. This is because there is still a chance of a loss or that the it actually was a wrong investment. Results of the monitoring activities also need to be communicated to the higher management so that they can intervene if necessary.

The decision to intervene needs to be made by someone that is independent of the investment department, so that this decision will not be influenced. Than the auditor needs to check if there are risk assessment reports for the investments which Olympus decided to invest in and also that the higher management approved of these investments. Further the auditor needs to check if monitoring is done frequently and have to look at the decisions made by higher management on the basis of the monitoring activities.

So for instance if these decisions are made by a independent person. We also like to advise Olympus to have strict procedures for when to abandon an investment, so that it will not be possible that after a loss incurred the investment stays in the portfolio in the hope that this investment will become profitable in the future and actually becomes more loss making. Furthermore it is important that Olympus only has employees in the investment department that are capable of making the right decisions and have the right knowledge of how to monitor and when to intervene.

In order to do so, Olympus must have strict recruiting policies and offer education and training to their personnel. Only then they can be sure, to a certain level, that their investors are capable of investing, know what they are doing and what risk they can take. With the continuous stream of new, complex financial products it is very important that the employees of Olympus are highly educated and have up to date knowledge. Apart from the investment department, every employee of Olympus should be aware of the , including the management.

Finally, it is important that there is an effectively working control IT system. A proper working system should be able to detect extraordinary high fees paid to e. g. consultants, extreme impairments on recently acquired companies and the transfer of money or losses to recently set up funds in dubious places (one has to admit that funds on the Cayman Islands should have raised some questions immediately). Once a proper IT control system is implemented it should be very hard for the directors to act as secretive as they did during the scandal. Chapter 3 3. 1Conclusion

The Olympus scandal became one of the largest loss-concealment schemes in Japan, routed back in the 1990’s. We conducted our research regarding this scandal starting from the company’s history and organizational issues. Then we gave insight into the scandal itself, followed by the investigation and statements of recommendations for control environment and control activities. The control environment in the Olympus company was forming and developing throughout the years of the company’s existence and various control activities were established. Nevertheless, it was not enough to prevent fraudulent actions.

Therefore based on our research the following procedures can be recommended regarding the control environment: revision of the company’s organizational structure to guarantee auditor’s independence, reassignment of all board members involved in the scandal, implementation of procedures to ensure “real” compliance with corporate policies at all levels, enhancement of HRM policies and practices to ensure high qualification and commitment of personnel. Moreover, strict procedures, control activities and regular monitoring over investments should be developed within the company, to eliminate chances of such fraudulent situation in the future.

A good ethics lesson can be learnt from the Olympus case. Collusion within the company’s top officers could hardly be prevented by internal control mechanisms. Therefore the Olympus scandal is a very representative example for the regulators to direct their efforts. Also it is a great confirmation of the fact that integrity and high ethical values should be followed and embodied by all the employees of the company, from the workers and engineers to the president and chairman.

Executive Summary The case discusses the Royal Ahold’s the major events that led to the demise of a great European company. The case presents some of the key issues in the areas of leadership, strategy, audit and accounting fraud that resulted in their disaster. The case identifies the problems made by the management in selecting the improper growth strategy and incentive plan that encouraged unethical behaviour from the senior management. The events presented touch and highlight management and governance issues, which are so important in managing global companies.

After analysis of the cases and financial statements, I have come with questions and concerns on the management and financial statements that could have caught this earlier on. Questions to be asked and process of approving budgets, corporate strategy, risk controls would have raised concerns on the management style. Some of the other recommended actions for board and its various committees would have discouraged the improper management practices. Some of these questions might have surfaced real issues and / or encouraged the right practice.

I found various accounting standards, challenges of global audit process; in this case it was led by Deliotte. The CEO’s and leadership growth strategy was the reward and recognition was improper. The number of acquisitions made during the 90s and continuous pressure was put on all subsidiaries to grow the sales by 15% were bad decisions. This alone led to many other problems within the company. The CEO’s growth strategy and desire to quickly grow the company put immense pressure on all other companies and senior management to somehow meet the CEO’s expectation.

It all resulted into fraudulent activities and ultimately disaster of great company. I recommend adopting changes to incentive plans, non-financial factors be part of success criteria. In measuring financial success, working capital ratio, inventory days, receivable and payable targets should be part of incentives. Above all, I recommend changes to the board committees and ensuring their work is independent was also important, i. e. audit committee, establishment of HR committee to raise issues and improve the overall organization culture. The case also highlights the issue of multiple accounting standards being practiced in very country.

A standard corporate wide accounting standard in Royal Ahold must have been used. Both external and internal auditors must have report ed numbers in a consistent approach. I recommend that auditors had direct reporting to board and should have empowered and trained to look for documentation and management structures in their audit process. Had they dig deep on all areas of concerns of material significance they might have found side letters. I have also highlighted other recommendations including the controls in the accounting standards and in preparing financial papers.

Incentive plans and corporate strategy be realistic to avoid unwanted behaviors. Tone of the top management including the board’s, assignment of responsibilities be clearly stated and periodically measured. Student id: 250712690 1 Management Accounting Exam Problem Identification: The case depicts another case of fail of governance and business ethics. This appears to be a fraud and not just accounting mistakes. By 2003, the time of the case, Enron, WorldCom and few others had already identified the need of business ethics and corporate governance.

Royal Ahold series of events happened mainly due to greed and unethical behaviour but what really underlies is the objective setting, growth strategy and, rewards recognition criteria set by management. The case also presents issues of cost accounting, in terms of, when to apply the manufacturing rebates. Consolidation of subsidiaries and joint ventures also played a role in this fraud. It also shows bad governance, flaws in external audit, failure of internal audit functions and to some degree their competency. Leadership strategy: Royal Ahold’s CEO’s strategy of 15% growth year-over-year was very aggressive.

The reward and recognition structure around the sales number was improper as it led management of all subsidiaries and other business units to increase the revenue and meet the targets. CEO kept communicating to board and shareholders the expectation around the sales strategy and likelihood of meeting these targets. Consequently, it created a culture whereby senior management were under pressure to meet the sales objective. The senior management and head of subsidiaries must have felt that missing the sales targets is not even an option. Accounting Fraud: The case presents few big issues of accounting.

Firstly, the issue is of the incorrect accounting treatment of manufacturing rebates and promotional allowances. My opinion is that rebates cannot decrease the cost of goods unless there is a certainty of getting the rebates. If the rebates are uncertain they cannot decrease the cost of goods incorrectly. From the case, it appears that management ordered more quantity of goods then they could have sold. They booked the rebates at time of goods received and decrease the cost of goods prematurely. (Assumption: It is not very clear from the case, if these rebates were booked as income or adjusted against the cost of goods i. . decrease in cost of item. I have assumed that Royal Ahold accountants decreased the costs (prematurely as per above paragraph). If these were booked as income, then it is even a bigger fraud and not an accounting error) Second accounting fraud problem is the accountants preparation of Royal Ahold’s parent company financial statements. They consolidated the financial statements including some of the joint ventures when Royal didn’t even had control over them. Royal Ahold did not own more than 50% of these Joint Ventures and did not have the control of the decision making.

They created fraudulent paper work to show they had control on these join venture companies. This is a pure fraud as they created agreements to satisfy auditors and try to hide the real facts. Audit: Both external auditors and internal auditors (and audit committee) failed to detect any of the accounting issues. It could have been missed as accounting standards in many countries is different. External auditors, even though they may all be of Deloite, of one country only audits that country statements, so they may not be familiar what might be happening in other parts of the company.

However, the Royal Ahold parent company auditors are responsible to have an oversight of companywide audit and should be held responsible for over -looking these fraudulent transactions. Internal audit and board’s audit committee failed to detect any of the misrepresentation either. On top of that in Netherlands there were two boards (Governing Board and Supervisory Board) and both boards weren’t able to detect or raise red flag on any of these problems and misrepresentations. Management having two sets of paper work with JV (Joint Ventures) without coming under the investigation shows incompetency of audit functions.

Governance / Audit Structure The way the governance and audit structure was laid out at Royal Ahold, there were five different committees and entities were responsible to review accounting and financial controls and practices that could have asked questions and raise concerns (red flags). They were: The governance board, supervisory board, the audit committee, internal audit department and the external auditors. Each should have independently reviewed management controls and financial statements and raise concerns and issues. Raising Red Flags

In my opinion, the governance structure and audit committees and external auditors were sufficient enough to handle or uncover such fraudulent activities had they been critical, created the right controls, empowered the internal auditors and obviously asked the right questions while reviewing the financial statements and other management documentation. As part of board, I would have asked questions following questions, or have acted when seen abnormalities. This would have helped me in identifying issues, concerns and in raising red flags on the Royal Ahold 1999-2001 financial statements.

Also some of them are related to mid 90’s management attitude and strategy. Strategy and Growth Approach: The target of meeting 15% year-over-year in sales, especially in US in 2000-01 when economy was in recession should have alarmed the board and internal auditors. They should have investigated how the sales targets are being achieved. It is not easy to meet 15% sales in US food industries under this economic climate. This may have led the management behaviour in meeting the targets.

As board member, I would have asked CEO to explain the strategy of rewards and recognition, mainly on top line bonus as it is a wrong choice. (I have personally worked at Compaq during 1999-2000 and have seen the issue of top line bonus and commission on sales. This led to Compaq’s continued crises and eventually it was bought by HP in 2003). I would tried to influence the board and hence the CEO to consider a more comprehensive rewards strategy. From my experience bonus strategy plays a big role in company culture. The other important factor that develops the management attitude is what CEO likes to hear.

It seems Royal Ahold’s CEO, Cees van der Hooven, wanted to hear from all his subsidiaries and Joint Ventures that sales targets are being met every quarter. I would have influence the management style and company culture to be protected by changing (or diluting) this approach. CEO’s attitude and leadership style was one of the leading cause of Royal Ahold demise. His aggressive acquisition approach would have resulted in integration issues within the company. As board member, I would have asked the management plans on integration and how culture of the organization would not be negatively impacted.

I would have created the board HR committee to influence management not to allow the negative impacts on the organization culture, integration within the organization, rewards and recognition be such that it would not have allowed the culture to deteriorate. The cultural issues, integration issues and above all greed among the management team members was uncontrolled in Royal Ahold’s accounting scandal. The growing number of acquisitions was extremely risky initiative; the corporate strategy was carrying high risks at all operational levels including controls, integration that may have led to frauds.

Also, this had potential to be a reputation risk as well. In my opinion, board should not have approved such an aggressive corporate growth strategy. Consolidated Statements Although Royal Ahold ownership is less than 50% in some Join venture companies, they showed controlling interests in some companies. To me an agreement paper presented by the management is not sufficient. I would have asked the significance of Royal Ahold’s control and ask management which areas of Joint Venture management we have been making decisions on.

If we are making decisions, even though we don’t own more than 50%, what are the risks associated with these decisions. As a board member, I would have understood how Royal Ahold has influenced the Joint Venture management. I would have also asked audit committee to understand the management structure of Joint Ventures. Taking a step further, assuming that 20% share would have given Royal Ahold right to appoint a board member on Joint Venture’s Board, I would have understood from the Joint Venture board member (through Royal Ahold appointed director) how the joint ventures decision making process really works.

By asking such questions and efforts in trying to understand from the board and management of Joint ventures how the organization is actually structured and working. If Royal Ahold does not have a controlling authority on the acquired company, the company financial statements cannot be consolidated. Royal’s accounting practice o f consolidation will first bump up the revenue numbers. This was purposely done to beef up the revenue figures. This may have resulted bigger bonus for the senior management. Also, the balance sheet would be more attractive to the shareholders (and potential shareholders). To explain this here is simple illustration:

Parent Current Assets Assets Total Assets Current Liabilities Liabilit ies Total Liabilities Shareholder’s Equity Debt to Equity Ratio Subsidiary Consolidated 3 7 10 1 3 4 4 10 14 4 1 5 3 7 0. 5 1. 5 3. 5 8. 5 3 2. 5 5. 5 2. 3 0. 6 1. 5 As illustrated in the above example, by consolidat ion the debt looks more attractive then it would have looked otherwise in the parent company. The debt to equity shows debt-to-equity of ($1. 5:$1) when consolidated, and ($2. 3:$1) when not consolidated. Similarly, other financial ratios would have looked good with consolidation of financial statements.

The consolidation resulted in better financial statements; hence Royal Ahold used this approach. In actual, this should not have used consolidated method. As per the accounting text, Parent when owns an investee company’s 20%-50% should use the equity method of accounting. The equity method would have mainly impacted the earnings on the Income statements. The net income, however, would result the same earnings without changing the revenue numbers. On the balance sheet side, the equity method would only show true “Assets” number, as per the investments made in the JV by Royal Ahold. The financial ratios (e. . debt to equity or quick ratio etc. ) will not be as appealing as it started to sound with consolidated statement. Risk Controls: As board member, I would have influenced the entire board not to approve the corporate strategy as a budget was too aggressive and unrealistic. As pointed out above, realistic targets are extremely important. If strategy is too aggressive and corporate culture is to share good news with the CEO the unrealistic budgets targets may lead to malpractice and improper (fraudulent) activities. In my opinion it is supervisory board obligation to approve only realistic targets.

The corporate strategy in the growth years of mid ‘90s was too aggressive. This has done part of the damage in the culture and mind-set of the senior management that 15% growth is not unrealistic and has created an attitude to meet these targets in any way possible. This encouraged the wrong doings and possible frauds that started to take place in 1999-2001. Although it is not very clear from the case, were there any wrong doing (or activities) in 199798, but in the hind-sight, it appears that some of the issues must have started or existed in that time as well.

The board and senior management should actively work on identifying risks to the organization and work on strategies that mitigates the risks. A key here is to have a formal risk assessment process on an annual basis. The assessment is under supervision of the board and results are reviewed by the board. Inventory 2001 balance sheet shows 20% rise in inventory, I would have raises some concerns that might have uncovered the management improper decision to order such high quantity of stocks to get the manufacturing rebates. Accounts Receivable

In 2001, accounts receivable increased by Euros 605M i. e. 21. 2%. I would have asked questions around the assumptions and likelihood receiving the Account Receivable. More importantly, who owes this receivable to Royal Ahold. This may have been due to the manufacturing rebates included in the accounts receivable. If so, it would have led to the whole issue of management aggressive behaviour on ordering stocks to get rebates. It might have opened up the entire incorrect accounting treatment of manufacturing allowances and rebates. General Reserve

Royal Ahold is showing consistently on their balance sheet a general reserve item that is over 5 to 6 Billion euros (approx). This appears to be high, I would have asked on what assumptions these provisions are made. It might have uncovered some of the assumptions that are being made by management. This general reserve is in addition to the 1. 5B euros in other provisions. This is should have been a red flag. Other Recommended Preventive Measures Besides the concerns and red flags mentioned above, I would have raised based on what I would have seen.

I would have also taken following measures to prevent this from happening. Incentive (Bonus) Structure: The bonus structure cannot solely be based on financial goals. The bonus structure has to base on non-financial goals as well. Within financial goals all aspects to kept in mind when designing the appropriate incentive program. The increase in working capital (inventory, receivables, payables etc. ) is kept at minimum or in line with the net income. The increase or decrease in working capital beyond the realistic proportion to earnings should be discouraged through the incentive program as well.

Audit Committee Structure: The case presents the audit committee and internal audit department weaknesses and signs of some of their inefficient processes and competency issues. Besides reviewing the audit committee performance, monitoring and control issues were also been found. I would have influence the audit committee to have a metrics of internal audit department. This may have encouraged more objectivity of audit functions and may have aligned management controls to the overall governance issues. It is the responsibility of audit committee that internal and external auditors have an open communication.

Besides audit of the current financial statements, and review of controls and structures, the auditors must identify areas of improvement in controls and work on action plan in improving the organization controls and monitoring process. HR Committee As mentioned above, I would have asked board to create HR committee that takes an active role in setting the controls in the organization. The committee should take an active role in reviewing the annual compensation and objective setting. Committee should have taken an independent review of key hiring decisions and management capability on integration and organization culture.

Some key decisions in this area should only made by committee after consulting with the management, audit and board’s general direction. IT System: I would have asked internal audit committee to ensure all IT systems are audited to ensure proper controls are in place. Usually, in fraud IT systems controls could have loop holes or management may have the ability to bypass some of the checks and balances and/ or segregation of duties. Consistency in financial Statements Royal Ahold had companies in four different continents and in many countries.

Financial statements presentation and laws across the globe are not consistent. US GAPP, Netherlands GAAP, IFSA and others are not standard across all countries where the Royal Aholds companies are in operation. While the fact makes a challenge for the board, it doesn’t give them an excuse of letting things slip. The board should have worked out with internal and external auditors in creating a minimum corporate standard across the group of companies. It is the flaw in governance and leadership to over-look this fundamental point.

WorldCom: internal audit lessons to be learnt On June 9 2003, the U. S. Bankruptcy Court of New York issued a report on the WorldCom accounting fraud that expands on the court’s earlier findings of mismanagement, lack of corporate governance, and concern regarding the integrity of the company’s accounting and financial reporting functions. Supervised by former U. S. Attorney General Richard Thornburgh, the study was commissioned by the court to investigate allegations including fraud, mismanagement, and irregularities within the company.

One section of the more than 200-page report, “Accounting and Related Internal Controls,” details WorldCom’s weaknesses in internal and external audit processes. It also expands on the failings within the internal audit reporting structure, where the tone at the top “fostered an environment to allow the fraud to go undetected. ” The report cited a lack of independence in the company’s internal audit reporting structure, which was not challenged by the audit committee or external auditors.

Observations on internal audit reporting and processes Internal auditing mission and scope According to Thornburgh’s report, internal auditing was focused primarily on maximizing revenue, reducing costs, and improving efficiencies. The group performed audits and projects that would be seen as adding value to the company, rather than monitoring the adequacy of internal controls to reduce risk. It did not, for the most part, trace transactions to the general ledger or verify journal entries that supported financial accruals.

Internal controls with an impact on accounting policies were not systematically evaluated or monitored by internal auditing, and findings were not communicated with the external auditors. Thornburgh’s report noted that this was a serious weakness in the internal control evaluation process that was not questioned by the audit committee or external auditors. He indicated that internal auditing’s narrow focus may have contributed, in part, to the company’s failure to detect some of the accounting improprieties.

Management’s influence over The internal audit department’s mission and scope was not internal auditingtruly independent. In spite of the dual reporting line to the audit committee, the internal audit group reported and answered to senior management, including the chief financial officer and chief executive officer, who were both implicated in the fraud. Thornburgh indicated that the viability of the internal audit department was dependent on the “whim” of senior management.

For years, internal audit leadership sought to gain company acceptance by focusing on value-added audits and projects rather than monitoring the sufficiency of internal controls. Management would assign special, non-audit projects using unscheduled resources, and the internal audit department did not meet its audit plan objectives, in part, because of the time and resources devoted to these projects. Lack of budgetary resources seriously Internal audit resources were insufficient in comparison to impacted the internal audit function peer companies.

The audit committee failed to follow through on discussions with internal auditing about the adequacy of staff. WorldCom’s internal audit department was half the size of internal audit departments in peer telecommunication companies, according to the 2002 Global Auditing Information Network study, conducted by The Institute of Internal Auditors. The Thornburgh report concluded that internal auditing’s limited resources were inappropriate from an internal control perspective, given the international breadth and scope of the company’s operations and challenges.

Lack of substantive interaction with After 1997, internal auditing had little interaction with the external auditors company’s external auditors, other than at quarterly audit committee meetings where both gave presentations. The external auditors did not receive internal audit reports and did not rely on internal audit work in their audits. Even though internal auditing identified internal control weaknesses in its final reports, there was no coordination with the external auditors to ensure that those weaknesses were not material, because the external auditor would report no material weaknesses in its own audits.

No one confirmed whether or not the internal and external auditors were communicating about such issues and analysing the materiality of the weaknesses identified by internal auditing. Deficiencies were noted in the annual The risk assessment used during the internal audit planning internal audit planning process process did not involve quantitative factors to measure risk with respect to internal control weaknesses or prior audit findings. The level of risk was determined by assessing whether or not the audit would add value, i. . , enhance revenue or detect significant cost savings. If an audit area’s level of risk did not meet these criteria, the audit would be considered low risk and would not be performed. Deficiencies were noted in the Thornburgh was concerned by the influence of management internal audit process and on the conduct and scope of internal audits as well as the the completion of audit reportsfinal reports. From the inception of the internal audit department — in or about 1993 — until January 2002, nternal auditing did not have uniform internal procedures relating to the conduct of audits, preparation or retention of reports and associated work papers, compilation and dissemination of management’s response to recommendations, conduct of follow-up audits, or steps to address repeated failure to take corrective action. Thornburgh found no explanation why uniform procedures were not developed prior to January 2002. In addition, he found unwarranted influence by management in the preparation of final audit reports and recommendations.

He felt that the language of many audit reports appeared to be negotiations between the internal auditors and management. In addition, management’s responses were not always presented to the audit committee. The report did note that internal auditing appeared to have performed its responsibilities diligently, given its limited resources and management pressures. Most internal audit reports identified internal control weaknesses, and many highlighted weaknesses identified in prior audits that ere not corrected to the satisfaction of the internal audit department. Internal audit improvements The internal audit department made several changes to improve the internal audit function in the company since the 2002 financial restatement and the adoption of the Sarbanes-Oxley Act of 2002. Internal audit management: •Increased staff by adding 12–15 auditors who are licensed certified public accountants, and anticipates hiring approximately 10 additional auditors. Strengthened training by requiring each professional staff member to obtain 80 hours of continuing education annually. •Added financial audits to the audit schedule, in addition to operational audits. •Created an internal audit team to task with the external auditors in connection with financial audits, communication, and planning. •Strengthened the risk assessment methodology to include an evaluation of materiality, audit frequency, changes in internal controls, and concerns by management, the audit committee, and the external auditor.

Supporters of companies going public suggest that gaining additional capital is one of the benefits medium sized companies gain by going public. The rationale for going public is to float the shares of the company through the by starting an initial public offer (IPO) inviting the public to purchase its shares and raise additional capital. Once the company has met all of the requirements for filing Security Stock and Exchange (SEC) they are in compliance with SOX.

Under SOX section 404, requires all CEO and CFO to certify and report to the public the effectiveness of internal control over the financial statements. Secondly, corporate social responsibility (CSR) is another benefit accrued by a medium sized company by going public through publication of it information. Aside from profitability, corporate social responsibility aids company to position ineffective market-based solutions to social. By CSR redirect negative problems caused by corporate operations onto the consumer and protecting their interests while hampering efforts to find just and sustainable solutions.

The rationale of publishing company information is to give the company a platform to state its willingness to take into consideration the stakes of all stakeholders involved in its financing and operations. This increases public confidence in the company. Going public also benefits a medium sized company by increasing its competitive advantage in the global market. Going public is a strategic objective by some medium sized companies to become competitively aligned. Finally, gain competitive advantage all through expanded capital base and improved public confidence.

Create an that the same goals may be achieved if the company remains a privately held entity. Provide support for your The opponents of public listing held that a company can acquire the benefits of going public while still being private and more efficient. For instance, Leuz (2007) asserts that a company can gain additional capital through borrowing loans from banks as opposed to going public. Corporate social responsibility can also be obtained even for privately owned companies that actively engage in community advancement programs.

In this way, the company meets the requirements of its stakeholders without exposing itself to public scrutiny and retains its ability to maintain a competitive advantage through internal strengths and enhanced customer relationship management (Dolvin & Pyles, 2007). The opponents of going public also hold that a corporation can devise ways of being strategically aligned while retaining its private status. For instance, a private company can make objectives that are strategically aligned to its vision and mission and narrow its market niche to serve the needs of its customers.

This can be achieved through strategies such as being the least cost provider for commodities or emphasizing unique customer experience through the provision of quality products. This disqualifies the perception that a company can only gain competitive advantage by going public (Li, Morton & Sonja, 2008). When a company decides to go public, it can typically obtain capital by issuing stocks or bonds. Suggest four (4) leading financial rations that will be evaluated and how each will impact the company’s decision to obtain expansion funds. Determine whether the results of the ratios would alter the decision to go public.

Financial analysis serves as both a control and planning tool. Aids in making important company decisions obtain expansion funds and also on the decision to go public or remain private. Liquidity ratio illustrates the ability of a company to pay its accrued debt in the short term. A company with high liquidity ratios is not advised to obtain expansion funds through debt since it cannot pay up the already accrued debt. It would be advisable for such a company to generate expansion funds by going public since this increases the equity ratio and reduces the debt and liquidity ratios (Alrafadi, & Md-Yusuf, 2011).

Activity ratio assesses the ability of the company to convert its assets to cash. When activity ratio is high, the company should go public since it already has liquid cash and needs to save up more of its finances through the floating of shares compared to borrowing cash. Profitability ratios assess the measures that organizations will use in making money. It mainly assesses the profitability of a company against the earnings ratio, and when this ratio is low, the company needs to remain private then go public since its profitability will not attract any investors (Alrafadi, & Md-Yusuf, 2011).

Debt ratio is aimed at assessing what amount of the company capital structure constitutes debt capital. Where the company has a lower debt ratio, it means that it has more of equity than debt, which is a good state in a company. In this case, the company can borrow debt capital or go public to gain more funds as it has a strong debt ratio. That it is essential to analyze the financial ratios of a company prior to deciding, whether to obtain more funds by going public (Alrafadi, & Md-Yusuf, 2011).

By researching, the results of SOX compliance surveys assess the financial impact that SOX might have on your company if it decides to go public. Considering the impact SOX compliance, take a position as to whether your company can overcome the posed by identifying the potential and disadvantages that SOX may have on your company. SOX is a legal framework developed by the United States with the aim of increasing the accountability and transparency of listed companies, especially pertaining to the cost of going public.

Transparency is one of the advantages gained by a medium sized company that uses SOX to go public. Structures put in place through SOX monitor the internal systems of the company, prevent failure, ensure accurate disclosures and improves the management of risk of the company. This enhances the transparency of the medium sized company and increases its credibility among the public and potential shareholders (Kaserer, Mettler & Obernberger, 2011). Going public with SOX also enhances the reliability of medium sized companies.

The consumers and members of the public are able to predict the company’s behavior since the company publishes its accounts. Through transparency and improved public scrutiny, shareholders and other stakeholders such as customers are able to view the profit of the company, the prospectus and evaluate the ability of the company to meet their expectations in the future. The consumers can through public scrutiny develop confidence on the medium sized company going public via SOX, which increases customer base and profitability of the company (Litvak, 2007).

Additionally, a medium sized company benefits from going public through SOX by enhancing investor confidence in the ability of the company to offer viable returns to investors’ investment. For example, an investor will be more confident in investing in a company that publishes its financial statements as a requirement of going public. This is because the investor will be able to view the profits of the company and its ability of the provide high returns on the investors capital. This benefits the company through investor loyalty and attracts more potential investors (Li, Morton & Sonja, 2008).

Cost is one of the major negative impacts of SOX if a company goes public. For example, a company has to incur underwriting cost, which is a, direct cost for a company going public. The company going public under SOX also incurs indirect costs like under-pricing of its shares in the stock exchange (Wintoki, 2007). The Company also incurs legal cost since are needed to advise the company on legal consequences of going public. In most instances, the cost of a company going public through SOX outweighs the benefit of going public and may have adverse effects on the company Leuz, 2007).

Lack of secrecy is another adverse effect of a company going public through SOX. For example, a company that discloses its financial records risks its strategic plans with its competitors, which robs the company the ability to remain competitive since its strategies and secrets are available for public scrutiny (Litvak, 2007). Moreover, involvement of external auditors is another adverse effect of SOX going public to medium sized companies. Example; prior to being private where a company would have just an internal auditor, a company that goes public also needs an external auditor to verify the internal systems of the Company.

This further exemplifies the operations and the auditing costs of the company by going public as a report of the external auditor are more reputable compared to that of an internal auditor (Grifin & Lont, 2005). Make recommendation as the CEO regarding the alternative (i. e. , going public or staying private) that will best support the company’s expansion goals. As the Chief Executive Officer of a medium sized company, I recommend that the medium sized company should go public as this will support the company’s expansion goals.

This is affirmed by the fact that going public fits into the strategic objectives of the company by being strategically aligned to gain competitive advantage. Although there are costs incurred during going public if the team is committed to the process and there are available resources to go public; economic feasibility evidences that the benefit of going public outweighs the risk and viable venture for any medium sized company. Moreover, though SOX has been challenged, the benefit that accrues to a medium sized company by going public affirms the rationale for a company to go public.