Pioneer is caught up in the country's biggest accounting scandal since 2015. In July 2019, Pioneer Corp president and his two predecessors quit after investigators found that the company inflated earnings by at least $1.2 billion during the period 2012-2017. Pioneer is one of the early adopters of the corporate governance reforms initiated in Canada. The corporate governance structure met corporate governance standards. Time and again cases of corporate governance failures have provided evidence that good corporate governance structure does not necessarily lead to good corporate governance. Organizational culture is a critical determinant of the quality of corporate governance.

Some of the observations of the independent investigation committee of the company on internal audit demand discussion and debate.

The investigation committee observes, "According to the division of duties rules of Pioneer, the corporate audit division is in charge of auditing the corporate divisions, the companies, branch companies, and affiliated companies. However, in reality, the corporate audit division mainly provided consultation services for the 'management' being carried out at each of the companies, etc. (as part of the business operations audit), and it rarely conducted any services from the perspective of an accounting audit into whether or not an accounting treatment was appropriate."

The observations of the committee give the impression that the fault of the internal audit in Pioneer was that it focused on consultation service rather than assurance service. Should internal audits avoid providing consultation services? I do not think so. It was not the fault of the internal audit that it provided consultation service. The fault was that it did not pay attention to the accounting audit.

In Pioneer, the top management used to set targets that are unachievable. There was excessive pressure from the top management to achieve those targets.

The variable pay is a significant portion of the total pay. The compensation of executive officers comprises a base compensation based on title and a role compensation based on work content. 40 percent to 45 percent of the role compensation is based on the performance of the overall company or business department. 'Challenge' to achieve unachievable targets and performance-based pay provides enough motivation to manage earnings. Therefore, an accounting audit should have been a focus area for internal audits.

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Internal audit can function independently only if the audit committee is capable, independent, and effective, and the internal auditor reports to the audit committee.

Earnings management had the tacit approval of the top management. Therefore, it is not surprising that an accounting audit was excluded from the scope of the internal audit. It is incorrect to infer that the accounting audit did not receive the attention of the internal audit because its focus was on providing consultation service.

Pioneer has a written code of conduct that requires all employees to understand and follow. Based on this mandate it has never had any ethical conflicts reported and therefore does not have a formal mechanism for top management or the BOD to receive confidential information from employees lower in the organizational hierarchy. Also, all Pioneers staff are required to complete a certain amount of continuing education credits every year. From what you can see, they seem to be well trained at their tasks, or at least they stay very busy. Furthermore, the Board of Directors and Audit Committee consist of several individuals who take their jobs very seriously. Members of its audit Committee consist of a doctor, an engineer, and a pharmacist. Moreover, management stresses an ethical environment. In their weekly meetings, each team reports its operating results and the different teams quiz each other and respond with solutions and challenges. In the weekly meetings, management encourages the teams to act ethically while achieving their mandatory year-over-year, 40% revenue growth numbers. Due to high industry growth, Pioneer has enhanced its market share largely by significant mergers and acquisitions. To keep up with its growth, Pioneer is constantly upgrading its internal control system. Fortunately, the well-trained staff has been able to continue testing the new programs after they are put in place and change programming problems as they crop up. The human resource department does not have formal procedures for recruitment, training, and termination.

In assessing the internal controls for the company, the auditor finds that the company bills customers and receives payments at three offices in three separate states using three different and incompatible software systems for tracking payments. Pioneers terms of sale vary with the customer and vary from thirty days to ninety days. Open invoices are aged based on when they were booked to the receivables, but cash, chargebacks, or rebates are aged based on when they were applied to the account. Thus, a credit could be posted to the customers account when it was received, but the related invoice(s) remains open as a receivable and continues to age. Chargebacks are significant and linked to a batch of the product rather than an invoice. Most similar companies have credit limits or credit checks but Pioneer does not because all wholesalers are board-certified M.D.s, like the companys founder.

Pioneers total accounts receivable was $35,276,025.

Pioneers total accounts receivable part due over sixty-one days $19,434,500.

Pioneers top-five wholesalers had accounts receivable of $16,457,516.

Pioneers top-five wholesale customers had $8,428,850 past due over sixty-one days.

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Pioneers allowance for doubtful accounts of $766,000 did not include any estimates for the top-five wholesale customers, because it was managements belief at the time was that the top-five wholesalers did not present a collection risk.

During the audit, the auditor noticed that only 20% of the confirmations of receivables were returned. Also, the general ledger of many accounts lacked documentary evidence, and the fixed assets depreciation ledger was not reconciled with the general ledger. The internal control report showed a number of internal control compliance problems.

In his audit work papers, the auditor included the following:

I inspected the entitys reports of prenumbered shipping documents that have not been recorded in the sales journal

In the course of my testing, I have found 0 items that have been sold but have not recorded in the sales journal.

Since testing was performed without exception, I have determined that the controls to address the completeness of sales transactions are operating effectively.

Required:

Answer the following questions:

1. What red flags do you see in the above description of Pioneers control environment?

2. What are the most important assertions for Pioneer?

3. Which essential elements of documentation requirements did the auditor omit from his

documentation?

4. What recommendations can be given to Pioneer to improve its internal control?