The North Face Inc Accounting Essay

The North Face Inc Accounting Essay Financial accountants and independent auditors commonly face challenging technical and ethical dilemmas while carrying out their professional responsibilities. This case profiles an accounting and financial reporting fraud orchestrated by the chief financial officer (CFO) of a major public company and his subordinates. The CFO, who was a CPA, took extreme measures to conceal the fraud from his companys audit committee and independent auditors. Despite those measures, the independent auditors identified suspicious entries in the companys accounting records that were a result of the CFOs fraudulent scheme but did not properly investigate those items. Shortly before the fraud was publicly revealed, a partner of the companys audit firm instructed his subordinates to alter prior year audit workpapers for the client to conceal improper decisions made by himself and his firm. History Hap Klopp founded North Face in the mid-1960s to provide a ready source of hiking and camping gear. In 1970, North Face began designing and manufacturing its own line of products after opening a small factory in nearby Berkeley. In 1980, North Face began sponsoring mountain-climbing expeditions across the globe. And North Face became the only supplier in the United States to offer a comprehensive collection of high-performance outerwear, skiwear, sleeping bags, packs and tents. Challenges Sales Growth vs. Quality Control By the mid-1980s, North Faces overburdened manufacturing facilities could not satisfy the steadily growing demand for the companys merchandise or maintain the high quality production standards established by management. New Era In July 1996, a new management team took North Face public, listing the companys common stock on the NASDAQ exchange. The management team established a goal of reaching annual sales of $1 billion by 2003. Later when the actual revenues and profits of North Face failed to meet managements expectations, the companys chief financial officer (CFO) and vice president of sales booked a series of fraudulent sales transactions. Barter for Success at North Face In December 1997, North Faces CFO Christopher Crawford negotiated a $7.8 million sale of excess inventory to a barter company in exchange for trade credits. Crawford knew that the authoritative accounting literature generally precluded the recognition of revenue on such transactions. Crawford, however, structured the transaction to recognize a profit on the trade credits. An Oral Side Agreement Crawford required the barter company to pay a portion of the trade credits in cash. To further obscure the true nature of the large barter transaction, Crawford split it into two parts. 1. On December 29,1997, a $5.15 million sale recorded($3.51 million in cash $1.64 million trade credit) 2. On January 8, 1998, the remaining $2.65 million portion of the barter transaction was booked. Consignments In the third and fourth quarters of fiscal 1998, Todd Katz, North Faces vice president of sales, arranged two large sales to inflate the companys revenues, transactions that were actually consignments rather than consummated sales. The first of these transactions involved $9.3 million of merchandise sold to a small, apparel wholesaler in Texas. Katz negotiated a similar $2.6 million transaction with a small California wholesaler a few months later. Erasing the Past Richard Fiedelman served for several years as the advisory partner for the North Face audit engagement and during early 1998 served for a brief time as the audit engagement partner. During the 1997 audit, the Deloitte audit engagement partner proposed an adjustment to reverse the portion of the $7.8 million barter transaction recorded in December 1997 because he realized that the profit could not be recognized on a barter transaction when the seller is paid exclusively in trade credits. The Deloitte audit partner passed on the proposed adjustment since it did not have a material effect on North Faces 1997 financial statements. While supervising the review of North Faces financial statements for the first quarter of 1998, Fiedelman allowed the company to improperly recognize profit on a portion of the $7.8 million barter transaction booked in January 1998 for which North Face was paid exclusively in trade credits. During the planning phase of the 1998 audit, Fiedelman convinced the new audit engagement partner that the prior year workpapers were wrong and that the previous audit partner had not concluded that it was not permissible for North Face to recognize profit on the 1997 portion of the barter transaction that involved strictly trade credits. As a result of Fiedelmans guidance, the new audit partner did not propose an adjustment to reverse the January 1998 portion of the barter transaction that had been approved by Fiedelman. Fiedelmans subordinates altered the 1997 workpapers to change the conclusion expressed by the 1997 audit engagement partner that North Face was not entitled to record profit on a sales transaction in which it was paid entirely in trade credits. Consequences The SEC sanctioned North Faces CFO, the companys vice-president of sales, and Richard Fiedelman for their roles in the North Face fraud. Questions 1. Should auditors insist that their clients accept all proposed audit adjustments, even those that have an immaterial effect on the given set of financial statements? Defend your answer. No. Clients are not prone to adopting auditors proposed audit adjustments, which forces auditors to somehow determine on an aggregate basis the impact that proposed and/or passed audit adjustments have on a clients financial statements. The most common reason for a client not to make a proposed audit adjustment is that the client disagrees with the need for the given adjustment. We dont want to see that audit engagements ultimately become a tug-of-war between client management and auditors over proposed audit adjustments. 2. Should auditors take explicit measures to prevent their clients from discovering or becoming aware of the materiality thresholds used on individual audit engagements? Would it be feasible for auditors to conceal this information from their audit clients? Yes. To the greatest extent possible, auditors should not provide clients with access to the critical parameters or facets of audit engagements, including materiality limits. According to this case, the CFO used the materiality to subvert the integrity of the entire audit engagement. It is often not feasible to conceal information such as materiality limits from client personnel. For example, auditors always have client personnel pull documents, prepare various schedules to which audit procedures will be applied, and perform other important audit-related tasks. In completing these tasks, client personnel can often determine the auditors intent and/or the scope or materiality limit of a given audit test. Likewise, clients have access to the professional auditing literature and professional publications that discuss the general guidelines that auditors use in making important strategic decisions during the course of an audit, including the selection of materiality limits for individual accounts or financial statement items. 3. Identify the general principles or guidelines that dictate when companies are entitled to record revenue. How were these principles or guidelines violated by the $7.8 million barter transaction and the two consignment sales discussed in this case? According to FASB 605 Revenue Recognition Revenues and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash. Revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. Generally, barter transactions in which a company receives trade credits in exchange for merchandise should be recorded at the fair value of the merchandises given up since the ultimate realizability or economic value of the trade credits is typically not determinable at the time of the exchange. So, even though the exchange element of the revenue recognition principle is satisfied by such a transaction, the realized element is not necessarily satisfied, meaning that any profit on the transaction should be deferred. In the case at hand, there was clearly some question as to the fair value of the excess merchandise that was being sold to the barter company. A conservative treatment of the transaction might have dictated that a loss or writedown of the merchandise was actually the most appropriate accounting treatment for the transaction. FASB 605-15-25 Sales of Product when Right of Return Exists prohibits a seller from recognizing revenue (or profit, of course) when the given customer can return the product and the ultimate payment to be received by the seller hinges on the customer reselling the product. Both features of the revenue recognition rule were violated by the decision of North Face to record the large consignment sales: there was not a true exchange since the two customers did not pay for the merchandise and the given transactions were not finalized until the customers resold the merchandise, meaning that the realized requirement of the revenue recognition rule had not been satisfied. 4. Identify and briefly explain each of the principal objectives that auditors hope to accomplish by preparing audit workpapers. How were these objectives undermined by Deloittes decision to alter North Faces 1997 workpapers? According to AICPA AU Section 339. 03, audit documentation serves mainly to: a. Provide the principal support for the auditors report, including the representation regarding observance of the standards of fieldwork, which is implicit in the reference to generally accepted auditing standards. b. Aid the auditor in the conduct and supervision of the audit. Both of these objectives were undercut by the decision of the Deloitte auditors to alter North Faces 1997 audit workpapers. First, by modifying the 1997 workpapers and not documenting the given revisions in those workpapers, the Deloitte auditors destroyed audit evidence, evidence that demonstrated that the 1997 audit team had properly investigated the authoritative literature relevant to barter transactions and proposed an audit adjustment consistent with the requirements of that literature. Second, the alteration of the 1997 workpapers affected the decisions made on the 1998 audit. That is, the auditors during the 1998 audit relied on the apparent decisions made during the 1997 audit and thus reached an improper decision on the accounting treatment that would be appropriate for the barter transaction recorded by North Face in January 1998. 5. North Faces management teams were criticized for strategic blunders that they made over the course of the companys history. Do auditors have a responsibility to assess the quality of the key decisions made by client executives? Defend your answer. Yes. Major strategic blunders by client management can create an environment in which client executives and their key subordinates have a strong incentive to distort their entitys accounting records and financial statements. More generally, the overall quality of top managements decisions affects the inherent risk present during a given audit. Event though assessing the quality of key decisions made by client executives is not often seen as an explicit audit procedure within an audit program, auditors need to be aware that the competence of top management and the wide-ranging implications of that competence to all facets of an audit.

Make-believe plays

Make-believe plays are fundamental and vital elements in the overall development of the child. These are fantasy or imaginary plays in children usually between ages two and six, in which children practise their acquired knowledge of every day life and activities; they begin to play roles and mimic adult behavior as ways of thinking over what they have seen older people around them do. These plays contribute to the mental and emotional developments of children. Really all the developmental tendencies of the child are condensed in the plays. Make believe plays contribute to the formation of schemata; creating a mirror through which they see and interpret events and human interactions within the locality. In this way, the imaginative ability of this child is built. Apart from this, these fantasies plays help in their intellects and learning. Children who engage in them tend to envision imaginary things easier, they can create understanding pictures faster and their learning speed is faster. This is simply because these plays help develop their thinking and imaginary faculties, and learning is more pleasurable. Besides, role taking and sharing in these plays create a sense of belonging; this is the foundation for every human relationship. Although, they start first as solitary actor/actress, they soon realize the need to involve others. This helps them to understand the place of involving other people in their daily activities and achievements. This creates a connection between children. This way, a viable social life is incorporated to the growth process of the child, and this would continue into adulthood. Children use these means to try behaviors. They test what they have learnt and seen. This helps them master such and create a feeling of control over such. However, there are unfavorable concepts as death, fear, rejection, injury, incorporated into their plays, with a view to expressing such; thus, they develop significant control over these formidable threats.[Singer, 1996] Indeed, make-believe play is a creative way by which children develop their mental state, test their knowledge of life, try out behaviors and emotions, and engage in conversations with others. It is an essential part of their development. REFERENCES Singer, Dorothy, coauthor of The House of Make-Believe: Children's Play and the Developing Imagination   

Communication Is A Poor Understanding Of Communication Essay

We already have the basic skills that it takes to make everyday communication possible. After all, it’s something we’ve picked up on over time simply by listening and observing others. So why go the extra mile to learn more about something we have been doing since as long as we can remember? I have found that the answer is a lot simpler than one might expect. As we know communication is inescapable, we spend between 80 – 90% of our waking hours doing it. [4] Sadly, much of it is misinterpreted due to a poor understanding of proper communication skills. I believe that advancing our knowledge of communication will help to minimize these misinterpretations and maximize efficiency in all aspects of life. That said, communication is a far more complicated subject than I had ever imagined. Luckily its framework can be narrowed down into five principles: (1) be aware of your communication with yourself and others, (2) effectively use and interpret verbal messages, (3) effectively use and interpret nonverbal messages, (4) Listen and respond thoughtfully to others, and (5) appropriately adapt messages to others - each of which can be further broken down into subcategories. [4] I will be using these principles to break down the areas of communication I feel are my strong and weak points. To do so we must understand at least the most basic aspects in each. Keep in mind that when we describe ourselves, whether it’s how we look physically or our interior identities, we are to someShow MoreRelatedCommunication Barriers in the Workplace1113 Words   |  4 PagesCommunication barriers in the workplace Communication is the conveyance and flow of ideas from one person to another. The exchange of information takes place through letters, words, symbols and nonverbal behaviors. It involves the transmission of ideas from the sender to the receiver. Communication is effective only if the receiver fully understands the transmitted information. Many problems and failures occur in organizations due to poor communication. Objective and goals fail due to misunderstandingsRead MoreCultural Diversity At The California College Of Arts1234 Words   |  5 Pagesresulted in diversity in studies. This has not only affected the students but has led to poor results. Staff members including professors and administrators view students coming from low-income backgrounds as students not well prepared for academics. Latino students and black students have been associated with poor academic performance basing on their cultural practices. The professors have identified them as poor performers. Some student s have viewed black students as inferior pupils, in that suggestionsRead MoreLiterature Review : The Ntu Library916 Words   |  4 Pagesresearch used. The literature was used for the following headings; communication in the construction industry; communication vocabulary; Common communication barriers; overcoming communication barriers; Information and communication technology impacts and effectiveness. The breakdown of literature into headings will be done to review current literature and go further into each heading specifically. This will show a solid understanding of the highlighted discussion areas which are of relevant use fromRead MoreSelf Concept Through Interpersonal Communication Essay1340 Words   |  6 Pagesinterpersonal communication because I had an interest in it. This interest is because I didnt understand that ones self-concept affected the way one is perceived by others. I learned self-concept through class discussions, but I wanted a better understanding of ho w communication affects ones self-concept and how it affects ones perception Ones self-concept affects ones perception, attitude and behavior, which can be demonstrated during the process of interpersonal communication. AspectsRead MoreNurses and Non Verbal Communication1265 Words   |  6 PagesNon Verbal Communication Xu, staples and Shen define nonverbal communication as â€Å"facial expression and body language† and further mentions that communication is a reciprocal process between 2 or more people relaying understanding, ensuring the output is acknowledges and correctly conveyed. Video three’s interview indicates poor non verbal communication between 4:36 and 4:54. The Nurses’ body language is closed, leaning over the interview documents, not facing the patient, nor making eye contactRead More Communication Processes Used Within My Organization Essay1210 Words   |  5 PagesCommunication is important for the internal functioning of the organization and for interaction with the external environment. Communication is the transfer of information from a sender to a receiver, with the information being understood by the receiver. The communication process begins with the sender, who encodes an idea that is sent in oral, written, visual or some other form to the receiver. The receiver decodes the message and gains and understanding of what the sender wants to communicateRead MoreEssay on Communication in Radiology1561 Words   |  7 Pagesunnoticed by patients. It’s essential for doctors to have a general understanding of radiology procedures in order to treat patients appropriately. Mandatory training for physician assistants on understanding radiology exams will enhance communication between P.A’s and technologists, clarify communication between P.A’s and patients, and eliminate unnecessary radiation exposure by ordering radiology exams appropriately. Communication between technologists and P.A’s must improve. The constant struggleRead MoreEssay about Close Relationships Sometimes Mask Poor Communication625 Words   |  3 PagesClose Relationships Sometimes Mask Poor Communication Tanya Christian 122 English Composition II Interpersonal Communication August 2, 2011 1 After reading the article on Close Relationships Sometimes Mask Poor Communication it hit home for me. Me and my fiancà © have poor communication skills. We have been together for the past eight years, and we still have a problem commutating. He likes to take over the conversation, or cut me off when we are talking. He said that is becauseRead MoreSocial, Cultural And Historical Factors That Contributes Poor Communication1657 Words   |  7 PagesCommunication is the process of passing information from the sender to the receiver, it involves the use of words in verbal and written forms as well as signs of body language such as facial expressions. It is vital in the healthcare sector as it aids in building intrapersonal, interpersonal and group relationships. It is very important that doctors and nurses have a clear understanding of how to communicate within the healthcare sector. Poor communication emerges when the information is relayedRead MoreDifferent Interpretations Of Rework Within The Construction Management Literature1084 Words   |  5 Pagesrework have been found to be numerous. Table 1 shows the major factors, their shares and the range of authors within the pool contributing to each factor. As one can see, poor communication was indicated more as one of the greatest rework source. Communication And Rework A considerable amount of research has identified poor communication as accounting for rework (Love et al., 1999; Love, 2002b; Fayek et al., 2003; Love and Smith, 2003; Love and Edwards, 2004a; Love et al., 2004; Palaneeswaran, 2006; Hwang