Course Title / Code:
Auditing II
UDE 2005
Title:
Fraud Case of Tyco International
Lecturer:
Sir Mustaffa bin Bukhari
Date of Submission:
Week 10
Name of Students:
No.
Name
Matric Number
1.
Lim Tze Ching
UDE190175
2.
Nadia binti Baharuddin
UDE190188
3.
Nur Izzati Balqis binti Modir
UDE190195
4.
Nurul Hanis binti Mohamad Zamri
UDE190206
5.
Nurul Hazirah binti Mohamed Fikri
UDE190207
6.
Siti Nurul Aina binti Zulkiflee
UDE190217
Acknowledgement
First and foremost, I would like to send my biggest gratitude to God the Almighty for
giving us the inspiration to write, to pay attention to, to be creative and fully genuine with our
work. Throughout the whole fourteen weeks of executing this assignment, it is with His help
that we manage to achieve the final outcome – that is, this humble assignment.
Apart from that, I would like to thank our beloved lecturer, Sir Mustaffa bin Bukhari
for sharing his knowledge with us. It has been an honour to learn Auditing II with him and
open up our views to the world of auditing and figuring out fraud cases in a broad view and
combined perspectives. We would also like to thank our lecturer for helping us with our
assignment. We would not be able to get this done thoroughly without his help.
Furthermore, biggest round of applause to our parents who had helped us by giving
ideas and sharing information regarding the completion of the assignment, and fellow team
members –Lim Tze Ching, Nadia, Nur Izzati Balqis, Nurul Hanis, Nurul Hazirah and Siti Nurul
Aina – and classmates who had contributed in this assignment by giving full support and
sharing ideas with each other that eventually benefit us as a whole. We do hope that this
assignment will not only benefit us, but will benefit everyone else in general.
Table of Content
Acknowledgement
1.0 Introduction……………………………………………………………………………...1-2
2.0 Finding
2.1 Summarization of Tyco International’s case including synopsis………………..3-4
2.2 Internal control problems and recommendations………………………………..5-6
2.3 Tyco International and fraud triangle…………………………………………...7-13
3.0 Conclusion………………………………………………………………………………..14
4.0 Final exam component………………………………………………………………...15-16
5.0 References…………………………………………………………………………….17-19
1.0 Introduction
The introduction of this company may not be complex, but it is best to learn about it in
the most thorough way possible. To begin with, the words of Kemmerer, C., H. & Shawver,
T., J. (2007) shall be narrated. They mentioned that Tyco International Inc. is a global company
that is involved in manufacturing a huge selection of products. This selection includes electrical
components, healthcare items, fire equipment as well as security systems.
In accordance with the above explanation, Tyco International is a company that has
diversified from an aspect of manufacturing and service with five main operating groups,
known as Tyco Fire and Security, Tyco Electronics, Tyco Healthcare, Tyco Engineered
Products and Service and Tyco Plastics and Adhesives. Occasionally founded by Arthur J.
Rosenberg in 1960 as stated by www.referenceforbusiness.com, the company is operated
through three segments which is North America Integrated Solution and Services, Rest of
World Integrated Solutions and Services, and Global Products.
To add more spices to the story, the achievement that Tyco International get is World’s
Most Innovative Companies 2013 in rank of 69 but dropped off in 2014 and Global 2000 2016
in rank 898 but dropped off in 2017 on Forbes lists. The company now is more commonly
known as Johnson Controls’ subsidiary after an incident hit them. Before proceeding to the
intriguing incident, it is best to learn about the company’s earnings statements as per the years
2013 to 2015 respectively. Graph 1.0 will be representing them.
Net income ('000,000)
2015
2014
2013
0
200
400
600
800
1,000
1,200
Net income ('000,000)
Graph 1.0
1
1,400
1,600
1,800
2,000
According to www.financial-dictionary.info, even though Tyco International was a big
company and successful in their specialty area, but in 2002, there were news that the company
had a scandal related to fraud. This case was involved by former company CEO and Chairman
which is Dennis Kozlowski and former corporate Chief Financial Officer Mark Swartz that
involve amounts of $600 million from the firm. This situation happened because they gave
themselves interest free or very low interest loan that could be referred as bonuses which would
never be approved by the Tyco board. Apart from that, they were also accused of selling their
company stock without telling investors that must meet requirement under SEC rules.
To summarize it, Dennis Kozlowski and Mark Swartz has stolen $600 million dollars
from Tyco International through their unapproved bonuses, loan and extravagant company
spending. They covered their illegal actions by keeping away accounting books from
shareholders and board of members so that their criminal activities would not be detected by
any party. During their trial in 2004, they argued that the board of directors of Tyco had
authorized the principle questionable of $150 million that had been received as compensation
for service rendered.
The first trial ended in mistrial because of a suspicious incident that happened during
the final jury deliberations that a juror make some gesture that not supposed to do in the
courtroom and led to a person’s belief that incident have been set up for the defendants. In
second trial that happened in 2005, the court makes a decision that Kozlowski received a
minimum of eight years and four months of jail time with a maximum sentence of 25 years and
the same goes to Swartz.
2
2.0 Findings
2.1 Summarization of Tyco International’s case including synopsis
Based on the introduction of the company, Tyco International was a big and successful
company in the late 90’s. The company eventually marched through the industries and
becoming a well - known company in year 1999. They had received varieties of achievement
throughout those uprising periods. However, the year 2002 marked as the downfall of Tyco
International – the company had been exposed to some fraudulent activities that had ruined the
reputation of the company until this very moment.
The situation began when Dennis Kozlowski became the most important person in the
company. As the director of Tyco International, he took an advantage of his title on a superior
level. Considering the achievements that he gained which made him the director of Tyco
International, he had used them to hire or recruit individuals of his choice. His choice was his
own and he possessed the job authorization by making sure that he would recruit and authorize
the chosen individuals all by himself. He even gotten to a level where he would personally set
the positions for his workers, whatever he thought or believed applicable for them.
To expose more about the company’s internal control problem, a discussion upon the
Ceo’s relationship with the presidents shall be made. Dennis Kozlowski obviously had a close
relationship with the main presidents of Tyco International. As the CEO, he would collect all
sorts of information from four divisions of Tyco International and due to this, he would be
receiving all information beforehand and funny enough, he was the only one receiving it. This
had, eventually, allowed Dennis Kozlowski to spread information of what he believed would
be valuable for the Board of Directors to know and would still maintain their trusts on him. In
simple words, he knew everything from the presidents, but he would choose what he wanted
to share to the Board, so that they would think that everything was in a good condition.
Furthermore, Dennis Kozlowski was a goal – oriented person. He solemnly believed
that to have a successful company meant Tyco International had to earn high profits. In order
to make this work, the workers of Tyco International would implement any methods that they
thought would be possible since their director had pressured them to do so. The company’s
financial statements would always be the most affected documents since they were the targeted
items that whichever employees would use in manipulating the earnings. In simple words, the
internal control problem here is the financial statements were not kept under a safe person’s
custody to the point it could be randomly used by anyone in the company.
3
Employees that realized this as fraudulent would be fired for insubordination, whereas
those who reached Dennis Kozlowski’s expectations would be rewarded. By this, Tyco
International technically lost competent workers who were particular with problems that
occurred in the company.
In addition to this, the important internal control problem that needs to be mentioned is
the earnings of the company were guarded by the Board of Directors with Dennis Kozlowski
included in the list and due to this, there was a poor implementation of presentations and
disclosures and most importantly, valuations and allocations. Because of that, the earnings
could be used to purchase private luxurious lifestyles. Examples of spending made were
throwing a birthday party for Dennis Kozlowski’s wife that amounting to 2 million dollars and
spends 6000 dollar on shower curtain for his house. Meanwhile, the board of members used
2.5 million dollars of company’s fund to purchase a house. From these examples, it is clear that
the company’s assets were now of their own and they used them aggressively to fulfil personal
needs.
It is to be known that Tyco Company did have more than one fraudster in the company.
Exhibit A – Mark Belnick. Tyco International’s former general counsel. He was among one of
Dennis Kozlowski’s important persons and he had business records under his possession. This
allowed him to falsify related records that he believed required. To sum it up, Dennis
Kozlowski and Mark Swartz had eventually been charged for stealing $600 million dollars
from Tyco International. According to CFO (2005), Mark Belnick was also charged but on a
separate trial in July 2004.
Lastly, considering the fact that the fraud of Tyco International was more management
oriented, another internal control problem to be mentioned here is there were accounting
information that had not been disclosed and verified, which is against the principle of all
information should have their own internal verifications and disclosures. For example, Tyco
International had an employee loan program before and the personal loans had never been
authorized by the responsible individuals. It is also mentioned that Mark Belnick did not
disclose $14 million dollars of loans and that eventually had caused him some criminal charges.
To conclude this, it is to be known that these loans were purposely being kept off from the
company’s financial statements which caused it to be excluded from being a part of the
company’s assets and it had fought against the common principle of completeness in the
internal control system.
4
2.2 Tyco International’s internal control problems and recommendations
Based on the above summary, a few internal control problems of Tyco International
were identifiable. These problems were the foundation for the company’s downfall, and in
order to prevent this from occurring ever again, possible solutions should be recommended.
Below shows the internal control problems obtained from the case of Tyco International and
recommendations for each of them.
Weaknesses
Possible effects
Recommendations
1. Dennis Kozlowski recruited This could have caused him, Segregation of duties should
and authorized the chosen the
director,
to
have be implemented as a part of
employees of his choice all incompetent employees since Tyco International’s norm.
by himself. It is clear that they were not qualified for the Dennis Kozlowski could be
there was no segregation of work.
the only one authorizing the
duties
recruiting,
job, whereas the job of
choosing
recruiting could be given to
in
authorizing
and
respective job positions for
the
company’s
his executives and managers.
resource,
and
human
another
individual may delegate the
positions for the accepted to
be
either
managers
executives
based
or
on
the
appropriate requirements.
2. It is unacceptable for Tyco The employees were able to A finance supervisor should
International’s employees to use the financial statements to be appointed to hold the
have free-flow access to the manipulate
the
company’s financial
statements
and
company’s important files earnings since they had the prevent from exposing them
like
financial
statements ability to use them without unnecessarily
without any supervision.
having anyone stopping them.
to
other
employees. This is to ensure
that the financial statements
would not be damaged from
employees that did not get
authorizations to use them.
5
Weaknesses
3.
Possible effects
There was a poor and As
expected,
Recommendations
Dennis The presidents should be more
indirect
communication Kozlowski managed to play engaged with the company’s
between
the
presidents around with his choices of communication system by
and the board of directors. information – this action of his having official meetings with
This is due to the fact that allowed him to share things the board of directors and
Dennis Kozlowski was the that he chose to be shared. informing
the
directors
only director that would be This is clear that the board of regarding things that they
receiving information from directors would have no idea should know. This is to prevent
the presidents beforehand. of Tyco International’s actual miscommunication them and it
He would later on pass the condition, since there were would prevent the board from
information to the board by possibilities
himself.
that
Dennis getting insufficient amount of
Kozlowski could be hiding information, too.
many things from them.
4.
There was a mistake made This could jeopardize the The employees that had been
by the workers that had been employees’ rights of fixing fired should report to the
dismissed from the company something
for insubordination (in the wrong
that
in
is
the
clearly legal authorities regarding
company. Dennis Kozlowski’s behavior
view of their director) – they Furthermore, since there were of
did not report to the no
reports
made
to
committing
unethical
the conducts to ensure that the
authorities regarding the authorities, Dennis Kozlowski company would be in a much
fraudulent actions of Dennis would have full access in more controlled atmosphere in
Kozlowski.
5.
abusing his power.
the long run.
The assets of the company This could lead to having the There should be a supervisor
were not under a proper company’s
independent
person’s unnecessarily
assets
being that is independent from the
misused
or assets’ custody as it will help
custody. This is because, the worst case scenario, being in safeguarding the assets more
assets became accessible to considered as the employees’ accurately. Apart from that,
all workers in the company own property – they would proper
internal
verification
without proper control and intend to commit unrecorded should be done to authorize
reliable verifications.
actions of what they assumed any individuals that use assets
would be “drawings”.
6
belonged to the company.
2.3 Tyco International and Fraud Triangle
As an endeavor to respect Dr. Donald Cressey’s understanding and meticulous
observation towards factors of fraud, it is best to understand the true concept of fraud triangle,
Dr. Donald Cressey’s creation. Narrating the words from www.hrzone.com, the fraud triangle
is known as the foundation of fraud that describes a worker’s action of committing fraudulent
activities in his or her entity. There are three components encircling the humble fraud triangle
– pressure, opportunity and rationalization. All components of fraud triangle have to be fulfilled
in order to rationally confirm the occurrence of fraud in one’s workplace.
It is possible to relate the fraud triangle with the case of Tyco International, considering
the fact that they fulfill all conditions that strengthen the existence of fraud in the company. To
make this explanation simple yet informative, Figure 1.3 below shows the possible fraud
occurrence in Tyco International that can be presented in the form of fraud triangle.
Opportunity
- the management's free-flow
attempt to fraud
Rationalization
- hardcore self-convincing
and eventually become
fraud enablers
Pressure
- more than just financial
and personal pressure
Figure 1.3
As stated above, the fraud case of Tyco International may comprise of these three
components specifically categorized with their very own characteristics. They do obviously
relate with each other to the point where it is rationale enough to be considered as an action of
fraud. Further explanation about each component and their connection to Tyco International
will be discussed as follows.
7
2.3.1 Pressure
To begin with, pressure in the view of fraud triangle is defined as the solid factor of
why someone would be so obliged in committing fraud. As stated by Murphy, J. (n.d), it is
what motivates someone towards conducting things that are obviously fraudulent but would
still make it happen, regardless of it, since the person would be earning the things that he or
she really wants in return. There are many examples of pressure – someone may commit fraud
when he needs to deal with financial problems and he is certainly very desperate to get over
them. Furthermore, a drug or gambling addict may become pressured to fulfil the bad addiction.
Another one to add to the list is the pressure to have or perhaps prolong the on-going luxurious
lifestyle and make it more lavish than it already is.
From the definition and thorough explanation above, it is clear that pressure may occur
in many ways and it becomes a sole reason towards enabling fraud occurrences. In regards to
relating this to Tyco International, the company – when the fraud occurred – was not highly
and deeply compressed by financial pressure. In fact, the company was earning considerably
well and they did not have excessive debts and losses, too. Therefore, financial pressure cannot
be related to the company.
However, it is to be known that the company had a management body that was filled
with greed and they did have an unescapable temptation to have a lavish and “bring heaven to
earth” (read: luxuriant) type of lifestyle. This can be seen from the director of Tyco
International himself, followed by his team of executives who went after him since they had a
strong chemistry in dedicating their lives towards being slaves to money and luxuries. It is clear
here that they were not under hardcore financial pressure when they committed the fraud – they
were simply doing it out of greed and the motivation of earning more wealth was the very
thing that pushed them towards enabling it in the end.
As an example, Dennis Kozlowski had a strong desire of obtaining money and the
desire became stronger day by day where he made his way to earn more even though he already
had a lot in his possession. This does bring a resemblance of greed where he actually owned a
lot but it was practically not enough for him. So, the very pressure here is the pressure of living
a lavish lifestyle, where Dennis Kozlowski was being pressured to develop a luxurious lifestyle
even when he believed he did not actually need it that much in the first place.
8
His attempt of getting expensive items for himself and his wife by using the company’s
money shows that he was controlled by the mindset of needing luxuries and how they would
enhance his life for the better. Due to this, he had to fulfill this pressure and with all due respect,
he had to make it work.
Furthermore, according to Thoresen, T. & Jakobsen, A., R. (2008), Dennis Kozlowski
had the pressure of wanting to feel strong and powerful. This is stated as such because no
one stopped him from doing what he did, and he believed that he could take and steal more to
his heart’s content. It was clearly against the normal nature of control, but he had a strong
tendency to compete the nature. Therefore, it is clear that when he managed to go against the
nature of control and integrity with the fact that no one stopped him, he felt powerful and it
motivated him every day to do it again and again.
To conclude the above explanation, it is clear that the fraud case of Tyco International
was not under heavy financial pressure which is usually common among companies that are
struggling to keep up with their debts, expenses, etc. The very thing that pressured them is the
tendency and the need to have a wealthy lifestyle which benefited them but eventually, this
action brought a major destruction to the company.
2.3.2 Opportunity
To elaborate more on Tyco International’s connection with fraud triangle, another
factor to be considered is the company’s opportunity to commit fraud. According to
www.corporatefinanceinstitute.com, opportunity in the view of fraud triangle is widely known
as the conditions that are equivalent to being fraud enablers. There are many examples of
opportunity in the fraud triangle. One of them is when a company has weak internal controls,
which causes the proper behavior of the company to be poorly prevailed. The remaining ones
are the poor top management’s understanding towards ethical values, and when there are
inefficient accounting policies, it will be an opportunity for a company to illustrate their
fraudulent activities.
As an attempt to make this explanation simple but effective, Table 1.0 below represents
the opportunities that Tyco International had which enabled them to do the famous fraudulent
things that brought the whole entity to a major downfall. Further explanations regarding each
of the company’s opportunity will be discussed along the way.
9
Type of opportunity
Brief details
Weak internal controls The management of Tyco International had overrode the control set by
them and there was practically no one stopping their mischievous
attempts in the company.
Existence of unethical This is based on the management team’s concept of prioritizing their
top management team
personal gain more than maintaining the status of being critically ethical
in all situations.
Table 1.0
As shown in Table 1.0 above, these are the opportunities that Tyco International had
until the company managed to make their fraudulent activities work. To begin with, the first
type of opportunity shall be brought into this humble discussion. The moment when the
company had poor exposure and weak implementation of internal controls, it was the
upbringing of the top executives’ actions in doing what they did – stealing the company’s assets
especially money. As stated by Kennedy, K. A. (2012), the top individuals of Tyco
International – Dennis Kozlowski, Mark Swartz and Mark Belnick had everything against their
power to possess as much money as possible. The only time that they stopped was when their
action had been notice and after being caught, they obviously were forced to stop.
What poor internal control system has to do with this situation, a dear person could
curiously ask. From the cases of Tyco International involving the executives’ behavior of
misappropriating the company’s assets, it is clear that all these had successfully occurred
because the control environment in the company was absent. It is clear that control
environment is the foundation for an effective internal control system.
Therefore, when a company like Tyco International had lost it in the first place, there
is a high possibility that the remaining components of internal control system will be out of
reach as well, since the base was practically fragile and would be easily broken by the behaviors
of fraudsters. In simple words, Tyco International had an ineffective control environment. This
has allowed the nasty plans that are living within these individuals to be set free.
For instance, the main individuals of Tyco International such as Dennis Kozlowski,
Mark Swartz and Mark Belnick had set up their own rules which had allowed them to do
whatever it is that they wanted.
10
There was a time where the top management of Tyco International simply came up with
their own unanimous decision of not disclosing certain accounts like loans and perquisites from
the company, which is against the common will of accounting. They were able to do this
because everyone believed that it was the nature of the company, so eventually no one stopped
them from continuing what they did. Through this, it does show that when the top management
had control over everything, it is equivalent to giving an opportunity for them to be “on top of
the world” and implement their made up rules that would benefit them financially and
personally.
Apart from that, another type of opportunity that the fraudsters of Tyco International
had is the existence of unethical top management team. Being ethical is all about having
integrity and the ability to differentiate the wrong and the right. However, this was not common
in Tyco International. Starting from Dennis Kozlowski and the remaining top management
team, everyone seemed to be neglecting the concept of ethics in maintaining their abilities in
having personal gains.
When they maintained the individuals that shared the same perspective as them and
fired those that did not, it eventually became a part of the company’s nature. When this
occurred, it would be unnoticeable by other employees. Therefore, it became an opportunity
for everyone especially the top management to commit fraud even deeper since it had been
adapted to the common nature of the company, which made it become undetected in the end.
As a conclusion, it is clear that Tyco International had a lot of opportunities on their
behalf, especially when some of them are unexpectedly normalized in the company. Due to
this, we could learn that having these opportunities enabled the executives of Tyco
International to be the “role models” of stealing money. It gave an idea to other employees that
if the rich could take money when they already had tons of it, those who were below them and
had much lower salaries than the top management could obviously do the same thing, too. It is
very clear that these opportunities were the bad omens for Tyco International as it would
advocate towards having more fraudsters at the end of the day.
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2.3.2 Rationalization
The last fraud triangle component that should be brought into this humble discussion is
the rationalization of fraudsters in a company – or in this case, in Tyco International
respectively. Before going deeper into the explanation, it is best to develop some knowledge
upon this factor and its relation with the fraud triangle.
As mentioned by Miller, P. (2014), rationalization in the view of fraud triangle is the
complete script of monologue that fraudsters may have. The script of excuses may consist of
reassuring sentences, where they will create a belief that the fraudsters are not doing anything
that is highly forbidden. These lines of unacceptable assurances also appear as comforting for
the fraudsters by indirectly letting them know that it is fine to do whatever it is that they want
to do.
In Tyco International’s point of view, rationalization was one of the most important
factors that led the whole situation to become fraudulent. This is because, Dennis Kozlowski
and his other “robin hoods” were very dedicated in convincing themselves that what they did
was normal and it was acceptable. From this hardcore convincing action that they did, they had
managed to tell themselves that they could take the money because they highly deserved it –
they believed that they had sacrificed a lot for Tyco International and the company’s assets
(read: cash) could then be theirs to acknowledge the blood, sweat and tears that they had poured
into the company.
As an example, Dennis Kozlowski made an honest clarification regarding his fraudulent
actions in one of his interviews with Morley Safer, a journalist for CBS News. During the
interview, the latter confidently told the journalist that he was not guilty of any accusations that
were thrown upon him. He believed that he intended no crime, and no documents were being
burned or being shredded to vanish (www.cbsnews.com). It is equivalent to him telling Morley
Safer that taking the company’s money was not wrong and he strongly put his belief on that.
Apart from that, he even personally clarified that he had pushed the company to the
major stage of success and he had actually proved that it worked. From that clarification, he
strongly believed that he had all the rights towards all assets of the company and there was no
crime living behind those rights. This strongly represents the rationalization that he had since
it appeared as an excuse for him to take more and still consider it as acceptable.
12
Furthermore, according to Thoresen, T. & Jakobsen, A., R. (2008), Dennis Kozlowski
and other fraudsters in Tyco International had convinced themselves that they were allowed to
commit fraud and it would eventually be unacceptable when someone told them not to do it
anymore. Admitting that they had received bonuses, they convinced themselves that those
bonuses were advanced compensations that Tyco International had owed them before.
Therefore, they believed that they deserved those bonuses and there convinced themselves that
there was nothing wrong in receiving them.
From the explanations above, it is considerably clear that Tyco International had
committed all these important factors and eventually gave a solid proof that they had
strengthened the occurrence of fraud among the executives and management team of the
company. It may be harsh for the company, but realities are always harsh and they could have
actually realized that before doing things that they did. By fulfilling all components, it is with
the biggest hope that this fraud triangle represents meticulously all fraudulent actions that the
company had done and may become a solid foundation for the accusations of fraud that these
individuals of Tyco International deserved to get.
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3.0 Conclusion
In conclusion, auditing acts as an imperative role to play as it is a part of the
management work of the business organization. Implementing an effective internal control in
company can reduce the risk of asset loss, and helps ensure that plan information is complete
and accurate, financial statements are reliable, and the plan’s operations are conducted
compliance with applicable laws and regulations. It is an independent inspection of the
company's financial report to ensure that the financial information of the business organization
can truly and fairly reflect the company's situation.
Segregation of duties (SOD) is a fundamental element of internal control in which its
principle is to share responsibilities among employees and no one individual should perform
two of the three jobs such as custody, recording and authorization at the same time. When the
three jobs are properly segregated, fraud can be effectively prevented or detected. For example,
the assets of Tyco were not under a proper independent person’s custody could lead to having
the company’s assets being unnecessarily misused.
Hence, an effective and strong control activities can only be supported through
appropriate segregation of responsibilities and assignment of duties. If the resources are not
available to provide appropriate segregations, then management must assess the risk imbedded
in the processes and identify ways to appropriately monitor transactions and activity.
Besides that, supervision of controls should be implemented within organizations on
continuous basis in order to make sure management’s philosophy and operating style are
always in good condition. Organization’s leaders should always supervise on day to day work
in carrying out and recording transaction through internal checking of the work performed by
all employees including CEO. For example, presidents and board of directors should have a
direct communication with employees and always encourage the employees to speak out by
having official meetings whenever unusual things happen in operational activities in order to
prevent fraud happens.
To sum it up, properly developed internal control can positively influence business
operations, risk management, and decision making on all levels of the organization. Gaps or
flaws in the internal control must be fully assessed and regularly evaluated in order to provide
sufficient assurance regarding the adequate of controls. If management focuses only on the
activities related to “check the box”, they will miss some critical attributes that may result in
major breaks that ultimately impact the viability of the organization.
14
4.0 Final Exam Component
Discuss the impact of computerized accounting system usage in today accounting process on
the audit proses that being conducted by auditor.
Translating the words from Marivic (2009), computerized accounting system is known
as a type of scheme that records, organizes and summarizes transactions by enabling the usage
of computers and computer systems as a whole. There are many impacts of computerized
accounting system usage in today’s accounting process that will impact an auditor’s audit
process.
One of the many impacts of computerized accounting system for auditors during the
audit process is the accounting information will be highly accessible. This is stated per se as
computerized accounting system compresses everything in one place – all important
accounting information such as account receivables, cash, inventories and others are located
under the same application. This will allow auditors to conduct substantive tests for any account
balances that they want during any time of the day and wherever the auditors may be.
Considering the fact that auditors now can do their auditing jobs in one place, they can
simply log into the system and just look up for any accounts or perhaps, any financial notes
regarding them through specific keywords that will be functional when one uses the
computerized accounting system.
For example, an auditor may look up for “inventory” as one of the keywords that is
available in the system, and all balances and past transactions regarding inventories will be
exposed there for the auditors’ view. This shows the accessibility of auditors in looking for
accounting data that they want through the same accounting application, with all accounting
information practically and neatly compressed in one place.
Therefore, it is clear that when auditors can easily reach for information by just logging
in into the system and they can get everything that they want, it is seen as highly accessible
since auditors now can spend lesser time in finding relevant accounting data that they need or
perhaps just getting any extra information related to their clients’ accounting with less hassle.
Apart from that, another impact is auditors can understand the system because of its
simplicity. This is because, most business owners are not from a background of accountants
that can understand the flow of transactions and need some time to understand the transactions
and ways to record them.
15
Therefore, it may be quite challenging if there are lots of transactions that need to be
recorded and have to be transferred from journals to ledgers manually and this may create
inaccuracy of account balances. When such a case occurs, auditors may not get the effective
information that they will be needing.
Furthermore, another impact of computerized accounting system is it would ensure
proper custody of accounting information keeping that will ease the auditors’ work. This is
because, when the transactions and data are transferred to the software, auditors are still able
to manage their work as the recorded data will be maintained in the system. For example,
auditors are able to access the data even after the occurrence of any critical incidents like natural
or man-made disasters. It is to be known that the financial information from previous years
could still be looked up easily as they are kept in systematic orders. This could give an
opportunity for auditors to review previous financial information without needing to go through
stacks of paper ledgers manually.
However, despite all the positive impacts of computerized accounting system for
auditors’ use that had been discussed, there are also negative impacts that cannot be avoided.
There is a high possibility that the computerized accounting system may be attacked by any
computer viruses available. Unfortunately, it may happen anytime and auditors may not expect
it to happen at all. When such a case occurs, auditors will be losing not only their clients’
accounting data, but also the progress of their audit work, since everything can be updated from
the same system that had been affected.
For instance, during the crash of the accounting system, auditors may lose track on
their current auditing work and this may delay the whole process or they may not be able to
continue it if the clients do not have any backup data – that is, their manually recorded
accounting data. Therefore, this is seen as troublesome for auditors in completing their work
since the accounting data now are gone and they are possibly out of anyone’s reach.
Based on the discussion above, it is clear that the impacts of computerized accounting
system in today’s accounting process for auditors’ audit work are highly ubiquitous. The
system comprises more positivity compared to negativity, but that does not mean that there
would not be any negativity in matters regarding computer applications, since they are related
to technology that is yet to be perfected. There is no doubt that computerized accounting system
provides various impacts and expresses necessary flaws whenever needed, and this may give
room for further improvement on the computerized system to make things better and smoother.
16
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