Background and Content:

You have been employed as a forensic accountant by a company that started manufacturing and selling environmentally friendly products (paper straws) in year 2010. During the previous financial year (year-ending 31 December), sales revenues had more than doubled. This recent performance is not unusual, as the company has always managed to enjoy huge success since it started the business nearly a decade ago.

Given its track record in performance, its three founding executive directors are seriously considering "going public" by making an initial public offering (IPO), by the end of this coming October. The three executive directors have been in business together since they started the company. Two of them were high school class mates, and the other joined them while all three were at university completing a business degree. Apart from these directors being very close friends, their respective spouses are also very close with each other.

In preparation for the IPO and in fulfilling stock listing requirements, the company appointed two non-executive directors last March. These directors are strictly business acquaintances of the directors, with their own successful businesses in the same industry. In addition, since the start of this financial year, the sales team has been working extremely hard to further increase sales revenues, especially, since they started receiving even more generous commission from July as an incentive to increase their selling efforts.

As part of your investigation of the company, you find that the directors have generally a positive relationship with many wealthy private investors, who are excited about the proposed IPO in October. However, you also found out from the Australian Securities and Investment Commission (ASIC) that the company had changed their auditors at the start of the previous financial year. As you further investigate this change of auditor, a reliable source at the audit firm reveals to you that it was because of a "heated dispute" one of the executive directors had with the audit partner. The dispute was over the highly aggressive way revenues were being recognized, particularly, over the last few years.

Prior to the start of this financial year, the company's board of directors had been meeting only twice a year to discuss how the business is doing. From the start of this financial year, the board of directors (now including the two non-executive directors) has decided to meet four times, given that it may be necessary to discuss issues regarding the upcoming IPO. The board continues to compensate the executive directors and senior management generously with stock options and cheap loans for their "good work".

Assessment Tasks:

Answer the question below:

Discuss up to nine red flags or symptoms that indicate that financial statement fraud may be occurring?