Question

summarize the events of a recent accounting scandal. Identify how

Answer 1

Answer

In 2014, a whistle blower working for L-3 Communications Holdings Inc (L-3) alerted the company to accounting misconduct. After the whistleblower exposed the illicit practices, and after new external and internal auditing, several weaknesses were discovered.Those weaknesses included cost overruns inappropriately deferred, inflated sales, and concealment of information from internal and external auditors.Four employees were fired and one resigned.

This impacted the stocks, causing their market value and prices to plummet. In 2016, L-3 failed to get a lawsuit brought against them by the shareholders dismissed. Shareholders brought the case against L-3 to stem more than $1 billion in losses due to the fraud.

To me, ethics and internal controls were to blame for the misconduct. As an employee of a company, any person handling finances, including the accounting side of finances, should have the highest levels of integrity, loyalty, and responsible stewardship. In addition to the accountants of the company, the internal auditors did not find the faults before the whistle was blown. That means they either did not fully know all the aspects of what services and/or goods the company dealt with and how they were captured in the various statements, or they did not go as deep into the auditing as they could/should have done. The story does not give a lot of detail on how often the auditors performed audits, nor how many were employed, both internally and externally. I am not sure if workload was an issue with the auditors, or if the auditors had collateral duties. Sometimes this can be the case where things fall through the cracks. One article mentioned the books were scrubbed to find the errors. This should have been done prior to the discovery. Once a year, or once every two years,scrub the books down to the lowest level.Also, the company could publish a desk guide that uses real-life entries and the expectations of how to account for them. Agreements could be signed that shows the employee understands the responsibility and proper procedures for posting in the ledgers and statements.   Another option is to periodically have accountants attend training on accounting practices, entries, and methods.