The top management was responsible to reviewing the strategic planning and budget planning as proposed by division managers. Besides the basic salary given to employees, management incentive plan (MIP) was applied to motivate individuals depending on performance in their respective departments The board of directors composed of Henry and Steve Sinko. The other three directors were partially active or retired executives.In addition, they had a strong acquaintance with Henry.
Lohnes Marine Hardware division
Firstly, the International Financial Standards (IFS) state that management should be reserved to independent entities to enhance accountability. In the case of Grave incorporation, Henry is noted as both the chairman and the Chief executive officer of the company. This is a breach of international standards and thus may contribute to a conspiracy in the financial reporting. Moreover, the fact that three directors are old friends to Henry might infiltrate the problem further. This is a reluctance on the part of shareholders not to assess the background information of directors before electing them.
The acquisition of Lohnes Marine Hardware company by Grave incorporation indicated that Lohnes company was to receive no corporate interference and thus posed a challenge for management and oversight of its operations. Additionally, Henry erred by failing to disclose the amount spent in acquiring Lohnes Marine company. The action contravenes the International Financial Reporting Standards (IFRS) that indicates that the amount obtained or spent through full or partial mergers should be disclosed to in the financial report and recorded in the financial statements.
Honesty is another issue that could result in fraudulent financial reporting. Patti Allen discussed with Don; the financial controller about Paul’s idea of declaring a shipping moratorium at the last week of the quarterly financial year. Patti headed to the idea and shipped large quantities to her large customers but did not enter the details into the shipping log. Instead , she backdated the invoice by one week. Such an action was taken without informing the management and the audit committee whose functions was to oversee the operations of the company. Despite the positive growth from the action, The $7.4 million held by Patti would not be recorded in its right financial category due to dishonesty.
The 1984 financial report was contradicting in that a transaction between sales and marketing department and Marine’s division advertisement firm was wrongly misrepresented in the books of account. $600000 had been paid as advertisement cost for the following year, but it was recorded as a current expense instead of a prepaid expense for the following financial year. The advertisement agency listed the income as a service for the current period.The contradiction formed the basis for the misrepresentation of 1983 and 1984 financial periods. Another factor that could have led to financial fraud is the information asymmetry among Don, Paul and Patti where Don was indecisive of the role to play between Patti and Paul in the smoothing of the company’s income.
Consumer hardware division
Leo Glaude was promoted to the position the president of the consumer division after serving in a lower position, in the same division. He had armed himself with experience about the operations but Unfortunately, he had little knowledge about finance and accounting. International Financial Reporting Standards (IFRS) states that the Chief Executive Officer(CEO)ought to have knowledge in financial management to avoid being duped by junior officers. Another loophole for fraud is as a result of the company to recognize sales revenue in the books of account when goods are shipped rather than when revenue was realized. This act was against the IFRS standards especially when loaded goods spend time till the next financial year before they are delivered.
Recognition of revenue in the books of accounts may lead to misleading financial statements and thus contrary to the IFRS. Incoherence of management structure between Leo sales department leaders Tim Bonsait and John Ahern is one instance. Tim and John devised an over shipment program to withstand the pressure from their boss; Leo. This occurred through re-entering a previous order, doubling the value, shipping an unordered product when it was not recognized in the inventory account. As a result, distributors could offer goods at a discount, exchange goods with other consumer divisions in order to seal the revenue gap. This act led to wrong information about the number of creditors because most of the creditors did not exist. Therefore, the financial position reported in 1984 was unrealistic because some details such as expense to hold goods on truck before distributors find customers, was not recorded appropriately.
The final contention that could have created a loop for fraud the misconception between The senior audit of Grave Incorporation and the division audit head. According to the international audit standards, the divisional auditors should periodically liaise with the senior audit committee and the management to ensure that there is coherence of financial information reported. In the case of Grave Inc, that never happened and unnecessary pressure from Leo; the president led to a discrepancy of revenue and overestimation of revenue. This effect can adversely affect the company in its subsequent financial year and may lead to debts and insolvency. Shareholders may realize the mismanagement of the company and withdraw their stake leading to loss of capital base.
Measures that should be taken to avert future happenings
First, the position of chairman and the Chief executive officer should be separated to avoid infringement of operation's activities. Henry should not hold the position of chairman and the chief executive officer Secondly; sales revenue should be realized and recorded in the books of account once the revenue has been obtained by the company. Additionally, senior audit committee and divisional auditors should conduct periodic auditing in order to realize discrepancies earlier before presenting the financial report.
Additionally, strict measures of accountability should be enacted to punish those employees who perform dishonest transactions such as failure to account for acquisition or merger of companies. As tentative measure, The agreement to create independence in the management in Lohnes company should be scrapped and instead fully merge the two companies into one under a single management to avoid collision of decisions as well as seal loopholes for corruption.