ACC 556 Week 5 Assignment 1:
08 February 2015
This assignment will investigate the unethical and unlawful activities perpetrated by three members of DHB Industries leadership team. David Brooks was convicted of insider trading, fraud, and obstruction of justice on September 14, 2010. This paper will describe the company and the fraud that was involved, outline an audit plan that could have prevented the fraud from occurring, determine and evaluate key types of audit evidence, and speculate two areas that would require more sampling and two areas that require less sampling in the audit process.
Description of Company, ...view middle of the document...
Brooks consistently withheld material information such as his previous conviction and ban from being a director of an investment company and the fact that DHB’s primary supplier was Tactical Armor Products (TAP), which was owned by his wife, according to the FBI press release (2013). TAP was in fact used to funnel money from DHB, through TAP and back to Brooks. Brooks and his subordinates were also guilty of insider trading by artificially inflating the value of DHB Industries and then selling up to $116 million worth of shares of the company.
The primary drivers of the fraud were inflated egos and greed. DHB was profitable and Brooks could have legally made a large amount of money, but that was not enough for him. He believed he would not get caught. Had he been more cooperative with auditors, he might not have gotten caught.
Outline of Audit Plan to Prevent or Detect Fraud
The fraud at DHB was rampant at every level of the organization, especially the top, so any plan to detect or prevent the fraud would have been difficult to execute. The Board of Directors and external auditing firms should have questioned the executives more thoroughly and requested government intervention at the first signs of wrong-doing. The most significant and evident sign of fraud were the fake inventory numbers, $60 million in extra vest components that never actually existed. A DHB controller alerted auditors of the overstated inventory and was then forcibly removed from the premises by David Brooks himself. This should have been a huge red flag and the auditors should have never issued an opinion on DHB Industries.
Internal controls that could have helped prevent some of the fraud include a whistleblower hotline and segregation of duties. According to Kimmel, Weygandt, & Kieso (2013), internal control systems must be monitored to ensure they are sufficiently protecting against fraud. There was a clear lack of internal controls at DHB. If the board of directors had implemented a hotline to anonymously alert them of any illegal activity, they could have been alerted of the fraud before filing and they could have warned the auditors of suspected fraud. Auditors could have tracked the cost of goods sold with purchase order receipts and shown more diligence in valuing the inventories claimed by DHB.
An audit plan that would have helped detect the fraud would include a thorough evaluation of the company’s inventories and inventory valuation methods. This would include receipts of all purchases to successfully determine the value of all inventories. I would also request documentation proving the quantities of remaining inventories at period end. This would allow for an accurate representation of cost of goods sold.
Key Types of Audit Evidence to Execute Plan and Evaluate Evidence
According Zhao & Harding (2013), “Since both financial statement representations and information systems evidence is susceptible to...