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Synopsis
Tech Data Group is one of the companies involved in this audit. This company is a subdivision of Tech Data Corporation, and it prides itself in providing technology products and services at wholesale prices. As such, the company works with over 9,000 employees. Tech Data Corp is located in Florida, USA. The company utilizes various product divisions to distribute its products and services to the computer and mobile communications industry. The main companys customers include value-added resellers and dealers in Ireland and UK.
In 2013, Tech Data announced a restatement to correct indecencies arising from how the company reflected vendor accounting. In 2014, the company conveyed a restatement in its 2013 financial report. This caused an increasing reduction in combined net income. The company was also restating some of the financial statements that had been audited in 2011 and 2012. When the restatements were published, Tech Data issued a press release. This was to sanction that a private investigation along with additional procedures conducted by interior and external teams had identified flaws in internal financial reporting.
This investigation was conducted because of the many accounting irregularities identified in 2013. The investigation reported that recognition of revenue and loss accounts of certain vendor incentives and price adjustments was delayed. Similarly, the income and loss accounts of certain promotions, vendor credits and product rebates were recognized at the wrong time and incorrectly. There were additional errors in some inventory transactions, foreign exchange profits and losses, accounts receivable and journal entries made manually. Bad debts and payroll costs were also recorded incorrectly.
The second company involved was Ernst & Young Global Limited. This company is based in London, England, and is one of the largest professional services networks globally. The company provides financial auditing, tax, advisory and consulting services to its clients. EY operates as a network of separate legal entities known as member firms in a partnership. The company has 312,250 employees. EY audited the financial statements of Tech Data Limited in separate phases. The team from EY was required to perform processes outlined by the group audit team on certain accounts and discoveries. The group audit team then received reports which were in line with their judgment of the Tech Data limited financial statements. EY used its reports issued to the group audit team to sustain its performance of the legal audit of the financial statements of Tech Data limited.
During the first phase, the company focused on the initial nine months of the financial year, ending 31 October 2011. The second phase focused on three months, ending on 31 January 2012. The company identified risks associated with misstatement due to fraud. Revenue recognition was not done properly, and the sales cut-off was improper. Additionally, the recognition of vendor receivables was incorrect. Similarly, the inventory and accounts receivable reserves were manipulated to an extent. EY also discovered that Tech Data Corp did not properly execute vendor incentive agreements.
The third-party involved was the Financial Reporting Council (FRC). FRC is responsible for modifying accounting and audit professionals and shared governance in the United Kingdom. The FRC Board governs the FRC. In 2014, the Financial Reporting Council concluded an investigation against EY and Julian Gray, who was their Senior Statutory Auditor. The investigation was conducted after EY, and Julian Gray admitted to misconduct when auditing the financial reports of their client for the financial year in January 2012.
Auditing and Professional Standards Imposed, and the Sanctions Applied
EY and Mr. Gray breached the auditing standards by failing to obtain reasonable assurance of the integrity of Tech Datas financial statements, failing to obtain sufficient appropriate audit evidence, and demonstrating insufficient professional skepticism. These standards were imposed on The Data Limited as they were the subject company being audited. This misconduct performed by EY and Mr. Gray was assessed and the FRC determined that that a reprimand and a fine would be the most suitable sanction. Additional aggravating factors were also considered when determining the suitable fine but none of them were present in this case. The respondents, in this case, admitted that their conduct did not meet the standards a member or member firm should have in various aspects. Mr. Gray, for instance, when auditing the financial statements of Tech Data Limited, misstated vendor rebates, dropped shipment accruals and provisioning of inventory and receivables. Mr. Gray did not practice professional skepticism, which led to the covering of shortcomings in the margin review by the management.
The respondents, in this case, were expected by the code of ethics to meet the specific standards of conduct (Megawati 2021). This meant that they were required to have professional knowledge vital to ensure that a client would receive competent expert services. The respondents were also expected to act attentively and in accord with practical and professional ethics. The Executive Counsel and EY agreed on various terms of settlement after they admitted to their misconduct. EY was to receive a reprimand and a fine of 2,750,000 dollars. This amount was reduced to 1,800,000 dollars because of the aggravating factors evaluated during the investigation. EY was also fined 225,000 dollars to pay for the costs utilized by the Executive Counsel to investigate the firm and member Mr. Gray. This amount was to be paid in twenty-eight days after the date of the settlement.
Mr. Gray agreed to the misconduct, and came to an agreement with the Executive Counsel. His fine would be reduced from 90,000 dollars to 59,000 dollars. This is after the Counsel evaluated various aggravating and justifying factors in the case. For instance, Mr. Gray apologized for the misconduct and he did not benefit from the misconduct. Additionally, more evidence suggested that he and his member firm were both misled by the Tech Data Company. Mr. Gray was also going to get a reprimand. Mr. Gray was not required to pay costs towards the Executive Counsel.
Impact of the Case on the Firm
The Tech Data Audit had some serious impacts on the parties involved and the public. For instance, there were various sanctions against EY. EY was reprimanded and fined 1.8 million dollars, which was a reduction from 2.75 million dollars. The reason for this fine was the admission of delinquency in association with the auditing of financial reports of Tech Data Limited. Julian Gray, who was a member of EY, was also fined 59,000 dollars which was a reduction from 90,000 dollars. Philip James, who was the former finance director at Tech Data, was fined 100,000 dollars since he admitted to the misconduct.
The former finance director did not adequately prepare and approve financial statements in 2012 and 2013. EY also established the Audit Quality Board to ensure their audits are of high quality. EY was also required to pay 225,00 dollars to cater for legal costs.
Impact of the Case on the Audit Profession
The Tech Data audit also motivated auditors in the industry to conduct high-quality audits. In the work, Internal Audit Effectiveness and the Using of Generalized Audit Software to Detect Material Misstatements, Control Deficiencies and Fraud, Tanzil and Sheik (2020) ascertain that individual auditors now invest in the latest technology and data analytics software to meet the growing needs of their investors, regulators and businesses. Additionally, auditing companies frequently train their employees to ensure they understand various standards that must be met when auditing financial statements.
Impact of the Case on Individual Auditors
Auditing firms and independent auditors also conduct their own internal reviews, ensuring that all the set auditing standards are met. Multiple independent auditors also invest in various tools. These tools help the auditors effectively digitize every aspect of the audit process. Independent auditors enhanced the use of first-quarter data to develop a comprehensive audit plan that focuses on the risks that count. As such, they can find appropriate strategies to fix the issues affecting their clients firms. Individual auditors also frequently update themselves on the latest auditing standards to avoid paying costly fines due to misconduct.
Impact of the Case on the Public
This case also enhanced accountability and protection of principal values in the public sector. It also motivated managers to conduct the publics business fairly and transparently. They also became serious in maintaining honest, equity and integrity when doing business (Kertarajasa et al. 2019). Officials also ensure that they support effective audit functions by establishing audit functions that meet expected elements. Due to the sanctions imposed against EY and Mr. Gray, auditors are keen to make sure they do not repeat the same mistakes the parties were reprimanded for. They aim to provide high-quality auditing services to all their clients.
Bibliography
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