Financial Statement Fraud

A former chairman, CFO, and controller of Donnkenny, Inc., an apparel company that makes sportswear for Pierre Cardin and Victoria Jones, pleaded guilty to financial statement fraud. These managers used false journal entries to record fictitious sales, hid inventory in public warehouses so that it could be recorded as "sold," and required sales orders to be backdated so that the sale could be moved to an earlier period. The combined effect of these actions caused $25 million out of $40 million in quarterly sales to be phony.

a. Why might control procedures listed in this chapter be insufficient in stopping this type of fraud?

There was no conspiracy to commit the fraud.Senior managers did not have the power to access many parts of the accounting system.The authorization control was subverted because most of the authorization power resided with lower management.It involved senior managers of the company.

b. Would an audit committee made up of representatives from senior management be effective in stopping this type of fraud?

YesNo