Question
Specter One, Inc. is a publicly traded cable provider. Among its current services are providing cable services, including television, Internet access, and local telephone service.
Specter One, Inc. is a publicly traded cable provider. Among its current services are providing cable services, including television, Internet access, and local telephone service. Specter One experienced rapid growth in all markets beginning in the late 1990s and continuing through now. While revenues continue to grow, income is showing signs of declining to a level beneath that expected by analysts who follow the company. In an analysis of why, Ethan Benedict, financial vice president, discovered that maintenance of cable systems has become an increasingly large cost—particularly in new cable coverage areas. He pointed out to Jillian Jonas, the president, that in the relatively new areas maintenance is high, particularly when viewed from the perspective that the areas currently have few customers. Jillian has suggested that it doesn’t seem right to face such high expenses when “everyone knows we will have a larger customer base in a few years in those areas.” Shortly thereafter, Ethan and Jillian decided to transfer out of Cable Maintenance Expense and into the Capitalized Cable account enough of these expenses to enable net income to meet analysts’ forecasts. Documentation in some cases was created indicating a correction of an error and in some cases, no documentation was created to support the entries. Subsequently, these types of transactions were posted quarterly, on an “as needed” basis. Ethan rationalized that it was indeed unfair to expense so much of the maintenance cost in rapidly growing areas. Jillian didn’t give it a lot of thought other than to periodically remind Ethan of how important meeting EPS growth rates were. The above scheme does not meet generally accepted accounting principles and led to materially misstated financial statements. Under generally accepted accounting principles, these transactions should have been expensed. Thus, Specter One, Inc. overstated assets and income.
Misstatements arising from Fraudulent Financial Reporting
- Review Appendix 1 below. Which fraud risk factors are present in this case? List them and cite the example from the case.
Incentives/Pressures | Opportunities | Attitude/Rationalization |
1.Threatened financial stability or profitability
profitability
2. Excessive pressure on management to meet requirements or third party expectations due to
3. Management or directors’ financial situation threatened by
4. Excessive pressure to meet financial target set up by directors or management | 1. Industry provides opportunities for
2. Ineffective monitoring of management allows
3. Complex or unstable organizational structure
board members Internal control deficient
| Relating to board members, management, or employees
attempts to justify marginal or inappropriate accounting based on materiality
|
Misstatements Arising from Misappropriation of Assets
Incentives/Pressures | Opportunities | Attitude/Rationalization |
| 1. Characteristics of assets
2. Inadequate internal control, including inadequate: • Segregation of duties
| Attitude or behavior of those with access to assets susceptible to misappropriation
lifestyle that indicate assets may have been misappropriate |
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IN THESE CASE SPECTER ONEINC OVERSTATED ASSETS AND INCOMEAS IT IS A PUBLICLY TRADED COMPANY IT WILL MISLEAD THE USERS OF THE FINANCIAL STATEMENT LET US LOOK INTO WHAT ALL ARE THE FRAUD RISK FACTORS PR...Get Instant Access to Expert-Tailored Solutions
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