Here’s the role you are playing in this Case Study:
You graduated from CSU Global with a Master of Professional Accounting degree.
You earned your CPA credential from the state of Oklahoma; you
applied and were accepted by the AICPA. After working in the field for
years, you are now a qualified auditor and you recently joined Skylar,
Morgan and Anderson Accounting Firm (SM&A).
First review the case study, and then answer the questions that follow.
Here’s an outline of this Case Study:
This year, Oklahoma Natural Solutions (ONS) was preparing for the
end-of-year audit plan, procedures and opinion for the annual 10K
report. SM&A was selected as the public audit firm that will prepare
the annual audit plan, assessment, audit procedures and opinion.
ONS is trading on NASDAQ for $9.00 per share. Two years ago, ONS had a
$25.00 per share value. ONS has a market float value of $100 million.
The main stockholders are pension funds, state retirement funds, hedge
funds in the oil sector, and thousands of individual stockholders. Last
year, ONS had earnings per share (EPS) of $2.00 and paid cash dividends
of $1.50 per share. The company has been under tremendous pressure to
raise the stock price. However, the oil and gas marketplace has been
very difficult with West Tennessee Intermediate (WTI) at $47.00 per
barrel and the natural gas well price at $3.05 cubic foot at Henry Hub
in Kansas. Henry Hub has nine major gas pipelines converging to supply
gas at the location in Oklahoma. Most of this natural gas product is
shipped by ONS to the northeast. ONS mostly has gas wells in the
Lakeland Shale play area of Oklahoma.
Background of ONS top Leadership:
-
Chairman of the Board: Alexander Fred, age 65. He has
been with the company for 40 years and was part of original group of
individuals that started the company. - CEO: Patrick Fred, age 42, son of the chairman. Family owns 36% of all common stocks and 90% of preferred Stock A.
-
CFO: Melinda Jones, age 38, a CPA who has been with the
company since she was 22 years old. Ms. Jones worked her way up through
the organization. She is well liked by the chairman, Alexander Fred.
Ms. Jones is a member of the AICPA and the State of Oklahoma CPA
organization. -
VP Production: Roger Rock, age 44, a petroleum
production person; oil is in his veins. Received his Petroleum
Engineering Degree from Texas A &M. Has been with the company just
one year. Prior to joining ONS, he worked for Chevron for over 20 years. -
Treasurer: Mrs. Hanna Hemp, age 36. She joined the firm
just six months ago. Worked for a hedge fund in the Boston area for 15
years. Considered a team player by the chairman, Alexander Fred.
Audit subcommittee from Board of Directors:
- James Fernandez, 63. He is on the BOD. College roommate of Alexander Fred. Mr. Fernandez has a CPA from Northern Kentucky.
- Bill Fideo, financial expert on the committee, age 27. Just joined
the board less than six months. He has never before been a member of the
Board of Director (BOD) or been on the audit committee with any
company. He is currently on the BOD. He earned his CPA from Southern
Oklahoma Tech.
Public Audit firm: Skylar, Maryland, & Anderson
Location of office: Swayzee, Oklahoma.
Partner in Charge, Ms. Loise Maryland. Partner with 25 years’ of experience in the oil and gas industry.
Accounting Audit Supervisor assigned to ONS, Ms. Sarah Diamond. She
has audit experiences with 15 years in the petroleum marketplace.
Audit accountants assigned to the client, ONS: Ms. Lisa Lang, two
years’ experience; Mr. Andy Anderson, 18 months of experiences; Mr.
Arnold Hernandez, one year of experiences.
SM&A won the bid process to perform the audit of ONS. The bidding
was extremely competitive among five firms. The partners with the
public accounting firm are hoping to have ONS as a client for the next
five years. The public accounting firm has been losing customers to
regional accounting firms in the last three years.
Ms. Maryland lives in a 5,000-sq. foot home in Oak Hill Country Club.
Her husband loves to play golf. He does not have employment with any
firm. Ms. Diamond loves working for Ms. Maryland and she would do
anything for her. They are extremely close.
Situation:
This year’s audit plan started out fine with cooperation between
management and the audit firm. However, during the first quarter review,
revenue numbers appeared to be higher in the vertical and horizontal
analytics on previous quarters and the annual financial statement. The
audit team meet to discuss the impact but could not find any negative or
accounting entries earnings management numbers. Ms. Maryland and Ms.
Diamond requested a meeting with Ms. Jones, CFO. In the meeting, Mrs.
Jones informed the audit team that everything was fine. They booked some
good sales in the quarter.
ONS management behind the scenes:
Sales have been flat for this year compared to last year. Natural gas
well prices are trending downward at Henry Hub. The average revenue gas
well per cubic foot price in the last year was $3.50. In this year, the
Henry Hub gas well price is around $3.05. Gas volume is only 5% higher.
In a recent closed meeting, Patrick Fred and Alexander Fred suggested
that Ms. Jones be creative and aggressive in booking revenue. No record
was kept of the conversation. Ms. Jones said she knew what to do. Mr.
Alexander Fred said having positive revenue would create a positive
environment for the ONS stock versus other companies of similar size in
the marketplace. In the meeting, Ms. Jones said nothing about integrity
or the duty to stockholders. She simply kept quiet on the issue.
Questions
- Using the AICPA Code of Professional Conduct (Links to an external site.), describe how this was either applied, misapplied, or completely ignored.
- Using the COSO Internal Control—Integrated Framework Executive Summary (Links to an external site.),
describe the internal control weaknesses. Provide your recommendation
for how to tighten up the controls for ONS based on the COSO summary. - Explain some of the actions of ONS leadership and the audit team based on the Fraud Triangle.
- Using a virtue ethics approach, explain the shortcomings and describe how these principles could have benefited SM&A?
- How would the duty-based concepts of deontology have been applied to this situation from both ONS and SM&A?
- Describe how ONS and SM&A might have altered their choices if
they would have been operating in the mode of transparency and in the
best interest of various stakeholders (stockholders, community,
employees, creditors)? - How might the consequentialism ethical theory have been expressed and practiced by Patrick and Alexander Fred?
- What could be the quantitative and qualitative benefits and costs for Mrs. Melinda Jones to follow the request?
- What might be the criminal and punitive damages under SOX to upper management if they certify this year’s financial statements?
Requirements:
- Your written paper should be 8-10 pages in length not counting the title and reference pages, which you must include.
- Integrate concepts, terms, and theories from the readings and modules contents.
- You need to cite at least 5 sources for this portfolio project,
outside of the textbook. Four of these sources must come from academic
journals. The CSU Global Library (Links to an external site.) is a great place to find resources. - Your paper must be formatted according to CSU Global Writing Center (Links to an external site.).
- If you need help formatting, writing, or doing research the CSU Global Writing Center (Links to an external site.) can help!
Review the Portfolio Project Rubric below for full details on how you will be graded on this assignment.
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