Assignment 3: Freescale Semiconductors, Inc.

Due Week 10 and worth 360 points

Review the Freescale Semiconductor case, located in Chapter 9 of your textbook.

503 to 506 ACP VS EBK FOR AUDITING: A BUS - 1 Year Option, 8th Edition Rittenberg/Johnstone/Gramling

CASE 9.1 freescale semiconductor, Inc. Who will guard the guardians? Juvenal During the summer of 2006, a syndicate of investors led by the Blackstone Group, one of Wall Streets largest private equity investment firms, initiated a secret plan to acquire freescale semiconductor. Based in Austin, Texas, freescale is among the worlds largest producers of semiconductors and for decades was a subsidiary of Mo- torola, Inc., the large electronics company. In July 2004, Motorola spun off freescale in one of that years largest initial public offerings. Blackstone retained Ernst & Young (E&Y) to serve as a consultant for the planned buyout of freescale. Among other services, Blackstone wanted E&Y to review frees- cales human resource functions and to make recommendations on how to stream- line and strengthen those functions following the acquisition. James Gansman, a partner in E&Ys transaction advisory services (tas) division, was responsible for overseeing that facet of the engagement. Similar to the other big four accounting firms, E&Y became involved in the invest- ment banking industry during the 1990s. in fact, by the late 1990s, the small fraternity of accounting firms could boast of having two of the largest investment banking prac- tices in the world, at least in terms of the annual number of consulting engagements involving merger and acquisition (M&a) deals. in 1998, KpMG consulted on 430 M&a transactions, exactly one more than the number of such engagements that year for pricewaterhousecoopers (pwc). Despite those impressive numbers, KpMG and pwc had not established themselves as dominant firms in the investment banking industry. in 1998, the total dollar volume of the M&a engagements on which KpMG and pwc consulted was $1.65 billion and $1.24 billion, respectively. those numbers paled in comparison to the annual dollar value of M&a transactions for industry giants such as Goldman sachs, which was involved in M&a deals valued collectively at nearly $400 billion in 1998. at the time, Goldman sachs, lehman brothers, Morgan stanley, and the other major investment banking firms consulted exclusively on mega or multibillion-dollar M&a engagements. by contrast, the low end of the M&a marketin which the big four firms competedtypically involved transactions measured in a few million dollars. E&Ys involvement in the huge freescale M&a deal was a major coup for the big four firm. When the transaction was consummated in December 2006, the price paid for the company by the investment syndicate led by the blackstone Group ap- proached $18 billion. that price tag made it the largest private takeover of a tech- nology company to that point in time as well as one of the ten largest corporate takeovers in u.s. history. not surprisingly, blackstone demanded strict confidentiality from E&Y and the other financial services firms that it retained to be involved in the planned acquisi- tion of freescale. James Gansman, for example, was told that blackstone wanted the transaction to be super confidential and was instructed in an internal E&Y e-mail to not breathe the name of the target [freescale] outside of the [engagement] team.1

During June and July 2006 while he was working on the freescale engagement, Gansman passed inside information about the pending transaction2 to Donna Murdoch, a close friend who worked in the investment banking industry. an fbi in- vestigation revealed that Gansman and Murdoch communicated over 400 times via telephone and text messages3 in the weeks leading up to the september 11, 2006, an- nouncement that the blackstone investment syndicate intended to acquire freescale. in that time span, Murdoch purchased hundreds of freescale stock options, which she cashed in on september 1112, 2006, realizing a windfall profit of $158,000. the fbi also determined that between May 2006 and December 2007 Gansman provided Murdoch with information regarding six other M&a transactions on which E&Y consulted. in total, Murdoch used that inside information to earn nearly $350,000 in the stock market. Murdoch gave that information to three other individuals, in- cluding her father, who also used it to produce significant stock market profits. published reports indicate that Murdoch became involved in the insider trad- ing scheme to help make the large monthly payments on a $1.45 million subprime mortgage on her home. the funds she initially used to play the market were provided to her by one of the individuals to whom she disclosed the inside in- formation given to her by James Gansman. in addition, Gansman at one point loaned her $25,000. the securities and Exchange commission (sEc) uses sophisticated software programs to detect suspicious trading activity in securities listed on stock exchanges. in early 2007, the sEc placed Murdoch on its watch list of individuals potentially involved in insider trading and began scrutinizing her stock market transactions. information collected by the sEc resulted in criminal charges being filed against Murdoch. in December 2008, she pleaded guilty to 15 counts of securities fraud and two related charges. in May 2009, Murdoch served as one of the prosecutions principal witnesses against Gansman in a criminal trial held in a new York federal court. During the trial, Gansman testified that he had been unaware that Murdoch was acting on the infor- mation he had supplied her. Defense counsel also pointed out that Gansman had not personally profited from any of the inside information that he had been privy to during his tenure with E&Y. nevertheless, the federal jury convicted Gansman of six counts of securities fraud. a federal judge later sentenced him to a prison term of one year and one day.

in october 2007, the surging stock market pro- duced an all-time high of 14,164.53 for the Dow Jones industrial average. one year later, stock prices began plummeting in the face of an eco- nomic crisis triggered by the collapsing housing and subprime mortgage markets in the united states. the frenzied stock market over this time frame produced a record number of insider trading cases as unprincipled investors either attempted to make a fast buck when stock prices were trending ever higher or attempted to mitigate their losses when stock prices began nosediving. personnel at all levels of the big four account- ing firms routinely gain access to highly confi- dential inside information, information that can be used to gain an unfair advantage over other stock market investors. unfortunately for the ac- counting profession, James Gansman is not the only partner or employee of one of those firms who has been implicated recently in a major in- sider trading scandal. in January 2008, the sEc charged two former pwc employees with using confidential client information to earn large profits in the stock mar- ket. one of the individuals was on pwcs audit staff, while the other was assigned to pwcs trans- action services group, the pwc division compa- rable to E&Ys tas department.4 the individual in the transactions services group accessed the confidential information while working on sev- eral M&a consulting engagements for pwc. he then provided that information to his friend on pwcs audit staff, who relied on it to purchase securities of companies that were acquisition tar- gets. this latter individuals name was recognized by a pwc audit partner when he was reviewing a list of securities transactions for a client that an- other company was attempting to acquire. the audit partner informed the sEc, which then filed insider trading charges against the two friends. in november 2010, the u.s. Department of Justice filed insider trading charges against a former Deloitte tax partner and his wife, who had also been employed by that firm.5 the couple allegedly obtained confidential informa- tion regarding seven Deloitte clients that were involved in M&a transactions. according to the sEc, the couple communicated that informa- tion to family members living in Europe who then engaged in securities involving the com- panies that were parties to those transactions. the sEc reported that the former Deloitte part- ner and his wife netted more than $3 million in stock market gains between 2006 and 2008 from the insider trading scheme, while their british relatives netted more than $20 million in profits.6 in investigating this case, the Justice Department and sEc sought and received the cooperation of the financial services author- ity, the british agency charged with regulating Great britains securities markets. to date, the most publicized case of insider trading directly linked to the accounting profes- sion involved thomas flanagan, a former vice chairman of Deloitte who spent 38 years with that firm. in october 2008, Deloitte announced that it was suing flanagan for allegedly trading in the securities of at least 12 Deloitte audit clients for which he had served as an advisory7 partner. Deloitte claims that Flanagan held and traded securities of his own clients for the past three years. The firm alleges he bought one of his clients stock one week before it announced an acquisition of a public company. He is also accused of violating the firms independence and conflict-of-interest policies and hiding his personal securities holdings from Deloitte. In his role as an advisory partner, he attended the audit committee meetings of seven of the twelve clients affected.8 press reports indicated that the clients linked to the allegations surrounding flanagan included all- state, best buy, Motorola, sears, and Walgreens. in august 2010, the sEc announced that it had settled insider trading charges that it had filed against flanagan. the terms of the settlement required flanagan to pay more than $1 million in fines and penalties. flanagan consented to the settlement without admitting or denying the sEcs allegations. flanagans son, who had alleg- edly made securities trades based upon inside information given to him by his father, reached a similar settlement with the sEc and paid fines and penalties of approximately $120,000. other litigation cases linked to flanagans alleged in- discretions are still ongoing, including the law- suit that Deloitte filed against him

Questions

1. identify the specific circumstances under which auditors are allowed to provide confidential client information to third parties. 2. suppose that you and a close friend are employed by the same accounting firm. You are assigned to the firms audit staff, while your friend is a consultant who works on M&a engagements. What would you do under the following circumstances: (1) your friend discloses to you highly confidential market- moving information regarding a soon-to-be announced merger; (2) your friend not only discloses such information to you but also informs you that he or she plans to use it to make a quick profit in the stock market? in your responses, comment on your ethical responsibilities in each scenario. 3. E&Y was providing a consulting service to the blackstone Group in connection with its planned acquisition of freescale semiconductor. Explain how a cpas professional responsibilities differ between consulting engagements and audit engagements

Assignment 3: Freescale Semiconductors, Inc.

Due Week 10 and worth 360 points

Review the Freescale Semiconductor case, located in Chapter 9 of your textbook.

Prepare a twelve to twenty (12-20) slide PowerPoint presentation with speaker notes in which you:

• Give your opinion as to whether or not additional laws and harsher penalties on financial fraud can eliminate or mitigate financial fraud. Support the rationale.
• Suggest three (3) new strategies that you believe the government can implement to eliminate or mitigate insider trading. Provide a rationale to support the suggestion.

1. In this case study, leaked merger and acquisition information was used to enable the fraud. Determine the key internal controls needed over the communication of confidential information to outside parties, and analyze the manner in which these controls act as a deterrent to fraudulent activities.

• Pretend you are Donna Murdoch in this case study and propose an alternative plan to act on the leaked information. Next, recommend one (1) strategy to communicate the alternative plan and determine whom the plan should be communicated with. Justify the response.
• In this case study, E&Y was providing a consulting service to The Blackstone Group related to its planned acquisition of Freescale Semiconductor. Compare and contrast the different auditors professional responsibilities between consulting engagements and audit engagements.

1. Take a position on whether more legislative and / or regulatory agency oversight will increase or decrease corporate fraud. Provide a rationale to support the position.

• Use at least two (2) quality academic resources in this assignment. Note: Wikipedia and similar type Websites do not qualify as academic resources.

Your assignment must follow these formatting requirements:

• Apply APA standards to citation of sources
• No more than four (4) bullets per slide
• No more than six (6) words per bullet
• Headings Times New Roman Font 36 Points
• Bullets Times New Roman Font 24 Points
• Add bulleted speakers notes
• Include a cover page containing the title of the assignment, the students name, the professors name, the course title, and the date.

The specific course learning outcomes associated with this assignment are:

• Examine the various types of financial fraud and the auditors responsibilities related to fraud detection.
• Evaluate the legal environment for liability related to financial audits and the proactive activities that a professional may take to prevent litigation.
• Use technology and information resources to research issues in auditing.

Write clearly and concisely about auditing using proper writing mechanics

ACC 562 - Advanced Auditing (Prerequisite: ACC 403) COURSE DESCRIPTION Surveys in-depth analysis of current auditing issues, including professional standards and ethics, internal control gathering and documentation of evidences, and statistical sampling. Focuses on detailed analysis of audit programs and EDP, as well as concepts concerning the financial condition and operation of commercial enterprises. INSTRUCTIONAL MATERIALS Required Resources Rittenberg, L. E., Johnstone, K., Gramling, A., & Knapp, M. C. (2012). Auditing: A Business Risk Approach with Cases (8th ed.). United States: South-Western, Cengage Learning. (Note: This is a textbook uniquely created for Strayer and can only be purchased through the Strayer Bookstore. The contents of the book differ from the national title.) Supplemental Resources Andrews, C., & LeBlanc, B., (2013). Fraud hotlines: Don't miss that call. Journal of Accountancy. Retrieved from http://www.journalofaccountancy.com/Issues/2013/Aug/20127043.htm Ference, S., (2013). Independence is in the eye of the beholder. Journal of Accountancy. Retrieved from http://www.journalofaccountancy.com/Issues/2013/Jun/20137656.htm McNeal, A., (2013). What's your fraud IQ? Journal of Accountancy. Retrieved from http://www.journalofaccountancy.com/Issues/2013/Aug/20137338.htm Rood, D., (2013). Is this client the right fit for your firm? Journal of Accountancy. Retrieved from http://www.journalofaccountancy.com/Issues/2013/Jul/20137770.htm Ziemba, S. (2012). Ethics IQ quiz. Journal of Accountancy. Retrieved from http://www.journalofaccountancy.com/Issues/2012/Oct/20125461.htm COURSE LEARNING OUTCOMES 1. Analyze the requirement for the profession of auditing and the integral role that independence assurance plays within the economy. 2. Examine the corporate governance of audits including the professional, regulatory, and corporate managerial requirements. 3. Analyze the process and regulatory requirements for professional ethical decision making. 4. Analyze the critical factors of business, audit, and planning risks, and the process of managing these risks in audit engagements. 5. Analyze an audit framework and assessment process for evaluating the effectiveness of internal controls related to financial reporting. 6. Examine the various types of financial fraud and the auditor's responsibilities related to fraud detection. 7. Examine the process for completing an audit engagement, evaluating subsequent events, and communicating with management. 8. Evaluate the legal environment for liability related to financial audits and the proactive activities that a professional may take to prevent litigation. 2014 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary information and may not be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of Strayer University. ACC 562 Student Version 1146 (1148 4-24-2014) Final Page 1 of 28 ACC 562 - Advanced Auditing 9. Examine advanced topics and current trends within the auditing environment. 10. Use technology and information resources to research issues in auditing. 11. Write clearly and concisely about auditing using proper writing mechanics. WEEKLY COURSE SCHEDULE The standard requirement for a 4.5 credit hour course is for students to spend 13.5 hours in weekly work. This includes preparation, activities, and evaluation regardless of delivery mode. Week 1 Preparation, Activities, and Evaluation Points Preparation Reading(s) o Chapter 1: Auditing: Integral to the Economy Activities Discussion 20 Evaluation None 2 Preparation Reading(s) o Chapter 2: Corporate Governance and Audits Other Preparation o Watch the video titled \"Bigger than Enron\" (51 min 37 s), or research other videos or articles on Enron Scandal. Be ready for blog entry 1. Video Source: FreeAsSlaves. (2013, June 19). Bigger than Enron [Video file]. Retrieved from http://www.youtube.com/watch?v=DeFdIHWy8cw. This video can be viewed from within your online course shell. Activities Discussion 20 Blog Entry 1: Enron Scandal Note: Blog is optional non-graded activity designed to promote student learning. Students are encouraged to complete the Blog activities. Evaluation None 3 Preparation Reading(s) o o Activities Chapter 3: Judgment and Ethical Decision Making Frameworks and Associated Professional Standards (From the start of the chapter to \"Further Considerations Regarding Auditor Independence.\") Case 3-55: Application of Ethical Framework 20 2014 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary information and may not be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of Strayer University. ACC 562 Student Version 1146 (1148 4-24-2014) Final Page 2 of 28 ACC 562 - Advanced Auditing Discussion Evaluation Assignment 1: Madoff Securities 4 280 Preparation Reading(s) Chapter 3: Judgment and Ethical Decision Making Frameworks and Associated Professional Standards (From \"Further Considerations Regarding Auditor Independence\" to the end of the chapter.) e-Activities o Go to the American Institute of Certified Public Accountants (AICPA) Website, located at http://www.aicpa.org/InterestAreas/ProfessionalEthics/Pages/ ProfessionalEthics.aspx. Next, read the Code of Professional Conduct, and review the key requirements of this code. Be prepared to discuss. o Using the Internet or Strayer databases, research the responsibilities of the audit committee under the SarbanesOxley Act of 2002. Be prepared to discuss. Other Preparation o o Watch the video titled \"Ghost of Scandals Present: Modern Pitfalls - Professor Mike Jones\" (28 min 58 s), or research other videos or articles on creative accounting practices. Be ready for blog entry 2. Video Source: GreshamCollege. (2013, January 31). Ghost of Scandals Present: Modern Pitfalls - Professor Mike Jones [Video file]. Retrieved from http://www.youtube.com/watch? v=mstjb403HdE. This video can be viewed from within your online course shell. Activities Discussion 20 Blog Entry 2: Creative Accounting Note: Blog is optional non-graded activity designed to promote student learning. Students are encouraged to complete the Blog activities. Evaluation None 5 Preparation Reading(s) o Chapter 4: Audit Risk, Business Risk, and Audit Planning o Case 4-65: Lincoln Federal Savings and Loan Activities Discussion Evaluation Midterm Exam: Chapters 1 through 3 6 20 120 Preparation 2014 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary information and may not be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of Strayer University. ACC 562 Student Version 1146 (1148 4-24-2014) Final Page 3 of 28 ACC 562 - Advanced Auditing Reading(s) o o Chapter 5: Internal Control over Financial Reporting Case 5-58: Control Deficiencies e-Activity o Read the article, titled \"The 2013 COSO Framework & SOX Compliance - One Approach to an effective transition\CASE 9.1 freescale semiconductor, Inc. Who will guard the guardians? Juvenal During the summer of 2006, a syndicate of investors led by the Blackstone Group, one of Wall Street's largest private equity investment firms, initiated a secret plan to acquire freescale semiconductor. Based in Austin, Texas, freescale is among the world's largest producers of semiconductors and for decades was a subsidiary of Mo- torola, Inc., the large electronics company. In July 2004, Motorola spun off freescale in one of that year's largest initial public offerings. Blackstone retained Ernst & Young (E&Y) to serve as a consultant for the planned buyout of freescale. Among other services, Blackstone wanted E&Y to review frees- cale's human resource functions and to make recommendations on how to stream- line and strengthen those functions following the acquisition. James Gansman, a partner in E&Y's transaction advisory services (tas) division, was responsible for overseeing that facet of the engagement. Similar to the other big four accounting firms, E&Y became involved in the invest- ment banking industry during the 1990s. in fact, by the late 1990s, the small fraternity of accounting firms could boast of having two of the largest investment banking prac- tices in the world, at least in terms of the annual number of consulting engagements involving merger and acquisition (M&a) deals. in 1998, KpMG consulted on 430 M&a transactions, exactly one more than the number of such engagements that year for pricewaterhousecoopers (pwc). Despite those impressive numbers, KpMG and pwc had not established themselves as dominant firms in the investment banking industry. in 1998, the total dollar volume of the M&a engagements on which KpMG and pwc consulted was $1.65 billion and $1.24 billion, respectively. those numbers paled in comparison to the annual dollar value of M&a transactions for industry giants such as Goldman sachs, which was involved in M&a deals valued collectively at nearly $400 billion in 1998. at the time, Goldman sachs, lehman brothers, Morgan stanley, and the other major investment banking firms consulted exclusively on \"mega\" or multibillion-dollar M&a engagements. by contrast, the \"low end\" of the M&a market-in which the big four firms competed-typically involved transactions measured in a few million dollars. E&Y's involvement in the huge freescale M&a deal was a major coup for the big four firm. When the transaction was consummated in December 2006, the price paid for the company by the investment syndicate led by the blackstone Group ap- proached $18 billion. that price tag made it the largest private takeover of a tech- nology company to that point in time as well as one of the ten largest corporate takeovers in u.s. history. not surprisingly, blackstone demanded strict confidentiality from E&Y and the other financial services firms that it retained to be involved in the planned acquisi- tion of freescale. James Gansman, for example, was told that blackstone wanted the transaction to be \"super confidential\" and was instructed in an internal E&Y e-mail to \"not breathe the name of the target [freescale] outside of the [engagement] team.\"1 During June and July 2006 while he was working on the freescale engagement, Gansman passed \"inside information about the pending transaction\"2 to Donna Murdoch, a close friend who worked in the investment banking industry. an fbi in- vestigation revealed that Gansman and Murdoch \"communicated over 400 times via telephone and text messages\"3 in the weeks leading up to the september 11, 2006, an- nouncement that the blackstone investment syndicate intended to acquire freescale. in that time span, Murdoch purchased hundreds of freescale stock options, which she cashed in on september 11-12, 2006, realizing a windfall profit of $158,000. the fbi also determined that between May 2006 and December 2007 Gansman provided Murdoch with information regarding six other M&a transactions on which E&Y consulted. in total, Murdoch used that inside information to earn nearly $350,000 in the stock market. Murdoch gave that information to three other individuals, in- cluding her father, who also used it to produce significant stock market profits. published reports indicate that Murdoch became involved in the insider trad- ing scheme to help make the large monthly payments on a $1.45 million subprime mortgage on her home. the funds she initially used to \"play the market\" were provided to her by one of the individuals to whom she disclosed the inside in- formation given to her by James Gansman. in addition, Gansman at one point loaned her $25,000. the securities and Exchange commission (sEc) uses sophisticated software programs to detect suspicious trading activity in securities listed on stock exchanges. in early 2007, the sEc placed Murdoch on its \"watch list\" of individuals potentially involved in insider trading and began scrutinizing her stock market transactions. information collected by the sEc resulted in criminal charges being filed against Murdoch. in December 2008, she pleaded guilty to 15 counts of securities fraud and two related charges. in May 2009, Murdoch served as one of the prosecution's principal witnesses against Gansman in a criminal trial held in a new York federal court. During the trial, Gansman testified that he had been unaware that Murdoch was acting on the infor- mation he had supplied her. Defense counsel also pointed out that Gansman had not personally profited from any of the inside information that he had been privy to during his tenure with E&Y. nevertheless, the federal jury convicted Gansman of six counts of securities fraud. a federal judge later sentenced him to a prison term of one year and one day. in october 2007, the surging stock market pro- duced an all-time high of 14,164.53 for the Dow Jones industrial average. one year later, stock prices began plummeting in the face of an economic crisis triggered by the collapsing housing and subprime mortgage markets in the united states. the frenzied stock market over this time frame produced a record number of insider trading cases as unprincipled investors either attempted to make a \"fast buck\" when stock prices were trending ever higher or attempted to mitigate their losses when stock prices began nosediving. personnel at all levels of the big four account- ing firms routinely gain access to highly confi- dential inside information, information that can be used to gain an unfair advantage over other stock market investors. unfortunately for the ac- counting profession, James Gansman is not the only partner or employee of one of those firms who has been implicated recently in a major in- sider trading scandal. in January 2008, the sEc charged two former pwc employees with using confidential client information to earn large profits in the stock mar- ket. one of the individuals was on pwc's audit staff, while the other was assigned to pwc's trans- action services group, the pwc division compa- rable to E&Y's tas department.4 the individual in the transactions services group accessed the confidential information while working on sev- eral M&a consulting engagements for pwc. he then provided that information to his friend on pwc's audit staff, who relied on it to purchase securities of companies that were acquisition tar- gets. this latter individual's name was recognized by a pwc audit partner when he was reviewing a list of securities transactions for a client that an- other company was attempting to acquire. the audit partner informed the sEc, which then filed insider trading charges against the two friends. in november 2010, the u.s. Department of Justice filed insider trading charges against a former Deloitte tax partner and his wife, who had also been employed by that firm.5 the couple allegedly obtained confidential informa- tion regarding seven Deloitte clients that were involved in M&a transactions. according to the sEc, the couple communicated that informa- tion to family members living in Europe who then engaged in securities involving the com- panies that were parties to those transactions. the sEc reported that the former Deloitte part- ner and his wife netted more than $3 million in stock market gains between 2006 and 2008 from the insider trading scheme, while their british relatives netted more than $20 million in profits.6 in investigating this case, the Justice Department and sEc sought and received the cooperation of the financial services author- ity, the british agency charged with regulating Great britain's securities markets. to date, the most publicized case of insider trading directly linked to the accounting profes- sion involved thomas flanagan, a former vice chairman of Deloitte who spent 38 years with that firm. in october 2008, Deloitte announced that it was suing flanagan for allegedly trading in the securities of at least 12 Deloitte audit clients for which he had served as an \"advisory\"7 partner. Deloitte claims that Flanagan held and traded securities of his own clients for the past three years. The firm alleges he bought one of his client's stock one week before it announced an acquisition of a public company. He is also accused of violating the firm's independence and conflict-of-interest policies and hiding his personal securities holdings from Deloitte. In his role as an advisory partner, he attended the audit committee meetings of seven of the twelve clients affected.8 press reports indicated that the clients linked to the allegations surrounding flanagan included all- state, best buy, Motorola, sears, and Walgreens. in august 2010, the sEc announced that it had settled insider trading charges that it had filed against flanagan. the terms of the settlement required flanagan to pay more than $1 million in fines and penalties. flanagan consented to the settlement without admitting or denying the sEc's allegations. flanagan's son, who had alleg- edly made securities trades based upon inside information given to him by his father, reached a similar settlement with the sEc and paid fines and penalties of approximately $120,000. other litigation cases linked to flanagan's alleged indiscretions are still ongoing, including the law- suit that Deloitte filed against him Questions 1. identify the specific circumstances under which auditors are allowed to provide confidential client information to third parties. 2. suppose that you and a close friend are employed by the same accounting firm. You are assigned to the firm's audit staff, while your friend is a consultant who works on M&a engagements. What would you do under the following circumstances: (1) your friend discloses to you highly confidential \"market- moving\" information regarding a soonto-be announced merger; (2) your friend not only discloses such information to you but also informs you that he or she plans to use it to make a \"quick\" profit in the stock market? in your responses, comment on your ethical responsibilities in each scenario. 3. E&Y was providing a consulting service to the blackstone Group in connection with its planned acquisition of freescale semiconductor. Explain how a cpa's professional responsibilities differ between consulting engagements and audit engagements Assignment 3: Freescale Semiconductors, Inc. BY: Your Name Submitted to: Date Introduction Freescale Semiconductor Inc. (FCI) is a global leader Providing industry leading products FCI's technologies are the foundation for the innovations Make the world greener, safer, healthier and more connected Introduction (Cont.) Some of Free scale's key applications and end-markets include : automotive safety, hybrid and all-electric vehicles, next generation wireless infrastructure, smart energy management, portable medical devices, consumer appliances and smart mobile devices. Opinion on Additional Laws and Harsher Penalties Additional laws and harsher penalties can eliminate crimes. there is certainty of punishment additional laws and harsher penalties will reduce financial fraud can make punishments more severe Additional Laws to Eliminate Financial Fraud 1. 2. 3. COSO And Tradeway Commission The Sarbanes-Oxley ACT 2002 (SOA): PCAOB Three Strategies for Eliminating Financial Fraud 1. 2. 3. Establishing a confidential helpline. Making it mandatory for broker firms to report insider trading. Cash awards should be instituted for correctly reporting insider trading operations. Insider Trading A crude way of understanding the issue is the "abstain or disclose" rule: You have material non-public information that others don't have. One either discloses it to the counter-party, or just don't trade. It's a healthy attitude to have from an ethics perspective Role and Remedy of SEC Should enable the whistle blowers to identify and report insider trading Should give offer the option of an entirely anonymous whistle blowers Should make it mandatory for brokerage firms to report insider trading There should be attractive rewards for whistle blowers Key Internal Controls Under This Case the company should have a code of ethics specify the punishment if a partner is found to violate the provision of communicating punishment should include: dismissal of the partner, a large mandatory fine, and reporting the incident to the Securities Exchange Commission. An Alternative Plan Donna Murdoch was r providing information to Richard Hanse or was trading on her own account Alternate plan would be communicated to her rich friend The secret partnership would commence once she persuaded her friend with insider information Auditor's Responsibility in Terms of Consulting and Audit Engagement The level of responsibility for an auditor is much higher than that of a consultant The auditor keeps client information confidential The consultant is also under legal and professional Consultant companies have their own standards The punishment can be immediate dismissal More Legislative and / or Regulatory Agency Oversight Will Increase or Decrease Corporate Fraud More laws and regulatory agency oversight will decrease corporate fraud If there is certainty of punishment corporate fraud will decrease Regulatory authority should identify and punish almost every perpetrator of corporate fraud Rational on Position Rational is based on the deterrent theory of crime. The logical conclusion is that if the corporate fraud is to be prevented harsher laws and closer regulatory monitoring is required. The monitoring is so precise that frauds are almost always detected. This changes the external factors in such a way that fraud is avoided. Conclusion Additional laws and harsher penalties on financial fraud can eliminate financial fraud. Additional laws can reduce the level of collusion Harsh penalties can make examples of managers References Rittenberg, L. E., Johnstone, K., Gramling, A., & Knapp, M. C. (2012). Auditing: A Business Risk Approach with Cases (8th ed.). United States: South-Western, Cengage Learning. Andrews, C., & LeBlanc, B., (2013). Fraud hotlines: Don't miss that call. Journal of Accountancy. Retrieved from http://www.journalofaccountancy.com/Issues/2013/Aug/ 20127043.htm