Something to share with our accounting & auditing blog's reader
Did you hear about the Sexy Management Accountant?
She went to see her fitness trainer to talk about stretch targets.
Sunday, February 12, 2012
Thursday, February 9, 2012
Inappropriate accounting for payment- Diamond Foods, Inc
As published in Diamond Foods' website on 08 February 2012. Diamond Foods, Inc announced that audit committee's investigation of the Company's accounting for certain crop payments to walnut growers is substantially completed. The findings shows that financial statement for FY 2010 and FY 2011 will need to be restated.
"The Audit Committee has concluded that a "continuity" payment made to growers in August 2010 of approximately $20 million and a "momentum" payment made to growers in September 2011 of approximately $60 million were not accounted for in the correct periods, and the Audit Committee identified material weaknesses in the Company's internal control over financial reporting." [ Quoted from the Company's announcement]
It is not mentioned on the accounting treatment for the payment to walnut growers. Questions we are interested in is:
- what was the accounting treatment that had been recorded for payment to Walnut Growers
- what should be the appropriate accounting treatment
- how would the financials been affected
- will the profit & loss of the Company been affected immediately
- are there any interested party relationship between Diamond Foods, Inc and those walnut growers
- had a proper review of the financials been reviewed earlier
For the 12-month-ended July 2011, Diamond Foods recorded a net profit before tax of about US$69mil. Shareholder's Equity amounted to US$495mil as at 31 July 2011. In our opinion, US$80mil of payment ( i.e. US$20mil + US$60mil) represents a significant amount to the Company's financial statement.
In addition, the audit committee also identified mateiral weakness in the Company's internal control. As evidenced, it is crucial to have a sound internal control environment to support the financial statement closing process of the Company.
"The Audit Committee has concluded that a "continuity" payment made to growers in August 2010 of approximately $20 million and a "momentum" payment made to growers in September 2011 of approximately $60 million were not accounted for in the correct periods, and the Audit Committee identified material weaknesses in the Company's internal control over financial reporting." [ Quoted from the Company's announcement]
It is not mentioned on the accounting treatment for the payment to walnut growers. Questions we are interested in is:
- what was the accounting treatment that had been recorded for payment to Walnut Growers
- what should be the appropriate accounting treatment
- how would the financials been affected
- will the profit & loss of the Company been affected immediately
- are there any interested party relationship between Diamond Foods, Inc and those walnut growers
- had a proper review of the financials been reviewed earlier
For the 12-month-ended July 2011, Diamond Foods recorded a net profit before tax of about US$69mil. Shareholder's Equity amounted to US$495mil as at 31 July 2011. In our opinion, US$80mil of payment ( i.e. US$20mil + US$60mil) represents a significant amount to the Company's financial statement.
In addition, the audit committee also identified mateiral weakness in the Company's internal control. As evidenced, it is crucial to have a sound internal control environment to support the financial statement closing process of the Company.
Wednesday, February 8, 2012
Fraud- Improper segregation of duties in handling cash
Misappropriation of cash is one of the common fraud reported in the corporate world.
In Nov 2010, it is reported that Malaysian unit sufferred a loss of RM 1.5million (approximately S$622k) due to the issuance of unauthorised cheque. It's not clear how this had occurred.
In general, one of the possibilities a cash fraud could occur is when certain individual forge the authorised signatories on the cheque. By forging the authorized signatories, the individual is able to direct the fund to his / her bank accounts. How can the internal controls of the Company helps to minimize the risk of cash fraud then?
Possible solutions are:
- to set dual authorized signatories requirement for the Company's cheque facilities
- existence of proper segregation of duties between cheque book-keeper, preparer of cheque, review of cheque amount, approver of cheque
- cash book review be performed by appropriate senior finance personnel
- review the cash movement by bank account on a monthly basis
The existence of above controls and/or procedures can help to mitigate the risk of cash fraud.
In Nov 2010, it is reported that Malaysian unit sufferred a loss of RM 1.5million (approximately S$622k) due to the issuance of unauthorised cheque. It's not clear how this had occurred.
In general, one of the possibilities a cash fraud could occur is when certain individual forge the authorised signatories on the cheque. By forging the authorized signatories, the individual is able to direct the fund to his / her bank accounts. How can the internal controls of the Company helps to minimize the risk of cash fraud then?
Possible solutions are:
- to set dual authorized signatories requirement for the Company's cheque facilities
- existence of proper segregation of duties between cheque book-keeper, preparer of cheque, review of cheque amount, approver of cheque
- cash book review be performed by appropriate senior finance personnel
- review the cash movement by bank account on a monthly basis
The existence of above controls and/or procedures can help to mitigate the risk of cash fraud.
Tuesday, February 7, 2012
Fraud- fictitious employee been created
One of the common fraud we have encountered / read on the news relates to payroll fraud, where fictitious employees were been created by individual to earn additional salaries on the fictitious employees been recorded.
One of the famous cases occurred in Singapore Airlines, whereby fictitious employees' hours were clocked in by payroll officer. Payroll officer pocketed the money successfully by entering the bank account details into the system to earn the extra hours clocked.
To minimize the risk of fraud arising from fictitious employees been created. There should be proper segregation of duties between:
a) personnel who have the access right to payroll system to create and employee
b) personnel who have the access right to enter bank acccount details of individual employee into the system
c) a reviewer ( who should not been entitled the right to edit, but been entitled the right to view) to ensure that the bank account details is input correctly
d) a reviewer who review the monthly payroll costs ( by department, by employee name); this reviewr should do a random testing to tally the summary of payroll cost details to timesheet submitted / revised letter of incremenet
The segregation of duties mitigate the risk that a fictitious employee can be created by individual.
One of the famous cases occurred in Singapore Airlines, whereby fictitious employees' hours were clocked in by payroll officer. Payroll officer pocketed the money successfully by entering the bank account details into the system to earn the extra hours clocked.
To minimize the risk of fraud arising from fictitious employees been created. There should be proper segregation of duties between:
a) personnel who have the access right to payroll system to create and employee
b) personnel who have the access right to enter bank acccount details of individual employee into the system
c) a reviewer ( who should not been entitled the right to edit, but been entitled the right to view) to ensure that the bank account details is input correctly
d) a reviewer who review the monthly payroll costs ( by department, by employee name); this reviewr should do a random testing to tally the summary of payroll cost details to timesheet submitted / revised letter of incremenet
The segregation of duties mitigate the risk that a fictitious employee can be created by individual.
Tuesday, January 31, 2012
Implication of Singapore Tiger Airway's Q3 results.
Tiger Airways Singapore posted a net loss of S$17.4mil in Q3 FY 2011, as compared to a net profit of S$22.5mil in same period last year.
The net loss for the Group was largely attributable to: losses generated from Tiger Airways Australia as a result of the CASA suspension, under-utilisation of aircraft fleets (due to 38.8% increase in the average size of the operating aircraft fleet and significant increase in fuel costs. Fuel costs (net of gain/losses on fuel hedging) has increased from S$54.5mil in Q3 FY 2010 to S$75.7mil in Q3 FY 2011.
Tiger Airways made the following comments in the outlook statement of its announcement:
“The Group expects to report a significant net loss for the financial year largely as a result of the CASA suspension in Australia, the under-utilisation of the Group’s aircraft fleet and exposure to high and volatile jet fuel prices.”
Implication of Tiger Airways’ results.
Tiger Airways’ results are alarming to audit clients involved in airlines, shipping, transportation, and logistics industries. This is because:
- global economy is experiencing slow down of business activities, which may likely to result in under-utilisation of capacities (e.g. under utilisation of vessels, fleets, trucks). Your audit clients may experience significant over capacities in current period of review;
- fuel costs have increased significantly during the period of review. Your audit client may record substantial fuel costs in current period.
The above factors, individually or in combined, may result in the audit clients record substantial operating losses. In addition, the above factors may trigger potential impairment on property, plant & equipments, going concern issue, capabilities of repaying creditors / borrowings.
The net loss for the Group was largely attributable to: losses generated from Tiger Airways Australia as a result of the CASA suspension, under-utilisation of aircraft fleets (due to 38.8% increase in the average size of the operating aircraft fleet and significant increase in fuel costs. Fuel costs (net of gain/losses on fuel hedging) has increased from S$54.5mil in Q3 FY 2010 to S$75.7mil in Q3 FY 2011.
Tiger Airways made the following comments in the outlook statement of its announcement:
“The Group expects to report a significant net loss for the financial year largely as a result of the CASA suspension in Australia, the under-utilisation of the Group’s aircraft fleet and exposure to high and volatile jet fuel prices.”
Implication of Tiger Airways’ results.
Tiger Airways’ results are alarming to audit clients involved in airlines, shipping, transportation, and logistics industries. This is because:
- global economy is experiencing slow down of business activities, which may likely to result in under-utilisation of capacities (e.g. under utilisation of vessels, fleets, trucks). Your audit clients may experience significant over capacities in current period of review;
- fuel costs have increased significantly during the period of review. Your audit client may record substantial fuel costs in current period.
The above factors, individually or in combined, may result in the audit clients record substantial operating losses. In addition, the above factors may trigger potential impairment on property, plant & equipments, going concern issue, capabilities of repaying creditors / borrowings.
Classification of male pig and female pig
In English:
A male pig is called a boar.
A female pig is called a sow.
In Accounting:
A male pig is classified as fixed asset.
A female pig is classified as inventory.
Disclaimer: just a joke, no bias against any gender.
A male pig is called a boar.
A female pig is called a sow.
In Accounting:
A male pig is classified as fixed asset.
A female pig is classified as inventory.
Disclaimer: just a joke, no bias against any gender.
Saturday, January 28, 2012
Importance of Suppliers' Evaluation Process
One of the key emphasis of internal audit is to evaluate whether your audit client has appropriate process in place to evaluate the suppliers.
Unfavorable event in any part of the supply chain will causes disruption to the distriubtion of products to end-customers successfully. It is important to evaluate the suppliers to ensure that they have the capability and stability to conduct sustainable business with your audit client on a long term basis.
On an ideal basis, management/ procurement of your audit client should have a formal policy on the entire process of evaluating suppliers. The evaluation has to be developed and documented in a proper format.
For instance, a background check on the suppliers is required (e.g. is the supplier a subsidiary of any congolmerates, is the supplier financially sounds). Another key document is the financial statement of the supplier. This is to ensure that supplier is financially stable to operate on a going concern basis.
Please let us know if you would like a detailed format of Suppliers' Evaluation Form. This is available in our Accounting & Auditing blog. Please drop us an email at myauditing@gmail.com.
Unfavorable event in any part of the supply chain will causes disruption to the distriubtion of products to end-customers successfully. It is important to evaluate the suppliers to ensure that they have the capability and stability to conduct sustainable business with your audit client on a long term basis.
On an ideal basis, management/ procurement of your audit client should have a formal policy on the entire process of evaluating suppliers. The evaluation has to be developed and documented in a proper format.
For instance, a background check on the suppliers is required (e.g. is the supplier a subsidiary of any congolmerates, is the supplier financially sounds). Another key document is the financial statement of the supplier. This is to ensure that supplier is financially stable to operate on a going concern basis.
Please let us know if you would like a detailed format of Suppliers' Evaluation Form. This is available in our Accounting & Auditing blog. Please drop us an email at myauditing@gmail.com.
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