ACC403 Wk 4 Assignment 1: Auditors and Regulatory Oversight TEXT: Auditing and Assurance Services - ARENS | ELDER | BEASLEY | HOGAN The Securities and Exchange Commission (SEC) regulates public companies. The SEC has found that some of these companies have violated GAAP by using creative accounting practices to mislead investors and creditors regarding the health of their company. Use the Internet or Library to research a recent accounting scandal within the last five (5) years where the SEC accused public companies of accounting irregularities. Write a four to five (4-5) page paper in which you: 1. Analyze the audit report that the CPA firm issued. Ascertain the legal liability to third parties who relied on financial statements under both common and federal securities laws. Justify your response. 2. Speculate on which statement of generally acceptable auditing standards (GAAS) that the company violated in performing the audit. 3. Compare the responsibility of both management and the auditor for financial reporting, and give your opinion as to which party should have the greater burden. Defend your position. 4. Analyze the sanctions available under SOX, and recommend the key action(s) that the PCAOB should take in order to hold management or the audit firm accountable for the accounting irregularities. Provide a rationale for your response. 5. Use at least four (4) quality academic resources in this assignment.  Note: Wikipedia and other Websites do not qualify as academic resources. The assignment must follow these formatting requirements: · Be typed, double spaced, using Times New Roman font (size 12), with 1” margins on all sides; citations and references must follow APA or school-specific format. · Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length. The specific course learning outcomes associated with this assignment are: · Analyze the required generally accepted auditing standards, professional ethics, and legal liability of the auditor. · Assess how the Sarbanes-Oxley Act has affected auditing. · Evaluate an audit report. · Evaluate objectives for conducting audits, and compare management’s and auditors’ responsibilities. · Use technology and information resources to research issues in auditing. · Write clearly and concisely about auditing using proper writing mechanics. Running Head: ASSIGNMENT 1: AUDITOR AND REGULATORY OVERSIGHT 1 AUDITOR AND REGULATORY OVERSIGHT 7 Auditor and Regulatory Oversight J Dr. University ACC403 AUDITING January 29, 2017 When the stock market crashed in October 1929, so did public confidence in the U.S. markets. Congress held hearings to identify the problems and search for solutions. Based on its findings, Congress in the peak year of the Depression passed the Securities Act of 1933. The following year, it.

1. ACC403 Wk 4 Assignment 1: Auditors and Regulatory
Oversight
TEXT: Auditing and Assurance Services - ARENS | ELDER |
BEASLEY | HOGAN
The Securities and Exchange Commission (SEC) regulates
public companies. The SEC has found that some of these
companies have violated GAAP by using creative accounting
practices to mislead investors and creditors regarding the health
of their company.
Use the Internet or Library to research a recent accounting
scandal within the last five (5) years where the SEC accused
public companies of accounting irregularities.
Write a four to five (4-5) page paper in which you:
1. Analyze the audit report that the CPA firm issued. Ascertain
the legal liability to third parties who relied on financial
statements under both common and federal securities laws.
Justify your response.
2. Speculate on which statement of generally acceptable
auditing standards (GAAS) that the company violated in
performing the audit.
3. Compare the responsibility of both management and the
auditor for financial reporting, and give your opinion as to
which party should have the greater burden. Defend your
position.
4. Analyze the sanctions available under SOX, and recommend
the key action(s) that the PCAOB should take in order to hold
management or the audit firm accountable for the accounting

2. irregularities. Provide a rationale for your response.
5. Use at least four (4) quality academic resources in this
assignment.
Note: Wikipedia and other Websites do not qualify as academic
resources.
The assignment must follow these formatting requirements:
· Be typed, double spaced, using Times New Roman font (size
12), with 1” margins on all sides; citations and references must
follow APA or school-specific format.
· Include a cover page containing the title of the assignment, the
student’s name, the professor’s name, the course title, and the
date. The cover page and the reference page are not included in
the required assignment page length.
The specific course learning outcomes associated with this
assignment are:
· Analyze the required generally accepted auditing standards,
professional ethics, and legal liability of the auditor.
· Assess how the Sarbanes-Oxley Act has affected auditing.
· Evaluate an audit report.
· Evaluate objectives for conducting audits, and compare
management’s and auditors’ responsibilities.
· Use technology and information resources to research issues in
auditing.
· Write clearly and concisely about auditing using proper
writing mechanics.
Running Head: ASSIGNMENT 1: AUDITOR AND
REGULATORY OVERSIGHT 1
AUDITOR AND REGULATORY OVERSIGHT 7

3. Auditor and Regulatory Oversight
J
Dr.
University
ACC403
AUDITING
January 29, 2017
When the stock market crashed in October 1929, so did public
confidence in the U.S. markets. Congress held hearings to
identify the problems and search for solutions. Based on its
findings, Congress in the peak year of the Depression passed the
Securities Act of 1933. The following year, it passed the
Securities Exchange Act of 1934, which created the SEC. The
Securities and Exchange Commission (SEC) mission is to
protect investors, maintain fair, orderly, and efficient markets,
and facilitate capital information (investor.gov). The SEC
requires public companies to disclose meaningful financial and
other information to the public. This provides a common pool of
knowledge for all investors to use to judge for themselves
whether to buy, sell, or hold a particular security. Only through
the steady flow of timely, comprehensive, and accurate
information can people make sound investment decisions
(sec.gov). The SEC relies on the Financial Accounting
Standards Board (FASB) to develop accounting rules and
standards to keep financial reporting accurate and honest.
Financial statements for publicly traded companies must be
prepared in accordance with generally accepted accounting
principles (GAAP). As a result, financial statements filed with
the SEC by public companies follow the GAAP accounting
guidelines established by the FASB provide a consistent
overview of the view of how companies have performed

4. financially.
On February 17, 2016, The Securities and Exchange
Commission charged bio-pesticide company, Marrone Bio
Innovations and a former chief operating officer, Hector M.
Absi Jr., with inflating financial results to meet projections it
would double revenues in its first year as a public
company. Founded in 2006, Marrone Bio Innovations is
headquartered in Davis, Calforinia. Marrone Bio Innovations,
Inc. provides bio-based pest management and plant health
products primarily for agricultural and water markets in the
United States and internationally. It offers herbicides;
fungicides; nematicides; insecticides; algaecides for algae
control; molluscicides for mussel and snail control; plant
growth and stress regulators; and water treatment products for
various applications, such as hydroelectric and thermoelectric
power generation, industrial applications, drinking water,
aquaculture, irrigation, and recreation.
The SEC alleges that former chief operating officer Hector M.
Absi Jr. concealed from Marrone Bio’s finance personnel and
independent auditor various sales concessions offered to
customers, leading the Davis, Calif.-based company to
improperly recognize revenue on sales. Absi allegedly profited
from the fraud. Moreover, Absi allegedly also inflated Marrone
Bio’s revenue by directing his subordinates to obtain false sales
and shipping documents and intentionally ship the wrong
product to book sales. Absi deceived investors into thinking
that it was a thriving, growing business that was achieving
increases in revenue. He resigned in August 2014 shortly
before the alleged fraud came to light and the company’s stock
price plunged more than 44 percent when the company informed
investors that its previously filed financial statements were
unreliable (sec.gov).
The SEC has instituted a settled administrative proceeding
against Marrone Bio’s former customer relations manager
Julieta Favela Barcenas for violations of the books and records
provisions of the federal securities laws. Favela entered into a

5. cooperation agreement to assist in the SEC’s investigation and
ongoing litigation against Absi.
As a result, Marrone Bio CEO Pamela G. Marrone has
reimbursed the company $15,234 and former CFO Donald J.
Glidewell will reimburse the company $11,789 for incentive-
based compensation they received following the filing of
Marrone Bio’s misstated financial statements, as required by
Section 304(a) of the Sarbanes-Oxley Act. They were not
charged with any misconduct (Cohn, 2016).
In a class action complaint for violations of the federal
securities laws, Marrone Bio Innovations was found to have
improperly recognized revenue for a certain transaction; that, as
a result, the Company’s revenue and financial results were
misstated; that, as such, the Company’s financial statements
were not prepared in accordance with GAAP. Given these
accounting irregularities, the Company announced financial
results that were in violation of GAAP and the following
principles: The principle that “interim financial reporting
should be based upon the same accounting principles and
practices used to prepare annual financial statements” was
violated (APB No. 28, 10) The principle that “financial
reporting should provide information that is useful to present to
potential investors and creditors and other users in making
rational investment, credit, and similar decisions” was violated
(FASB Statement of Concepts No. 1, 34); The principle that
“financial reporting should provide information about the
economic resources of Marrone Bio, the claims to those
resources, and effects of transactions, events, and circumstances
that change resources and claims to those resources” was
violated (FASB Statement of Concepts No. 1, 40); The principle
that “financial reporting should provide information about
Marrone Bio’s financial performance during a period” was
violated (FASB Statement of Concepts No. 1, 42); The principle
that “financial reporting should provide information about how
management of Marrone Bio has discharged its stewardship
responsibility to owners (stockholders) for the use of Marrone

6. Bio resources entrusted to it” was violated (FASB Statement of
Concepts No. 1, 50); The principle that “financial reporting
should be reliable in that it represents what it purports to
represent” was violated (FASB Statement of Concepts No. 2,
58- 59); The principle that “completeness, meaning that nothing
is left out of the information that may be necessary to insure
that it validly represents underlying events and conditions” was
violated (FASB Statement of Concepts No. 2, 79); and The
principle that “conservatism be used as a prudent reaction to
uncertainty to try to ensure that uncertainties and risks inherent
in business situations are adequately considered” was violated
(FASB Statement of Concepts No. 2, 95)
(howardsmithlaw.com).
According to an official litigation filed on February 17, 2016,
Absi intentionally withheld vital information regarding
financials and closing sale agreements that ultimately impacted
year end revenue totals to the company’s finance department
and independent auditors.
As a result of the above mentioned violations, I would hold
management accountable for failing to properly manage on of
their senior executives who clearly was making an unforeseen
impact into revenues. As Absi was “doubling” previous year’s
numbers, which should have sparked leader’s attention to
accurately understand how these events were unfolding. I
believe they Absi too much power that put him in a position that
allowed him to manipulate other individuals to do the dirty
work for him. During the independent audits, Absi was given
direct access to verify terms and conditions along with financial
records by the company’s controller to review for accuracy
before submitting. For this I fault Marrone Bio directly.
In light of the sustained regulatory focus, Marrone Bio and their
counsel should ensure that procedures are in place to evaluate
on an ongoing basis the sufficiency and effectiveness of internal
controls. In particular, management and audit committees,
working with outside auditors, are advised to evaluate whether
their existing controls are designed to address these risks. The

7. company should evaluate whether company growth, changes in
the regulatory or competitive environment, or other factors
warrant an increase in accounting and compliance personnel.
Recognize that the existence of a financial statement error is not
determinative of whether there is a material weakness in
internal controls under the definition provided in Regulation S-
X. More importantly, make sure that senior personnel are kept
informed and are actively involved in internal control
compliance (Halper, 2016).
References
Halper, J. M. (2016, May 4). SEC Enforcement and Internal
Control Failures. Retrieved May 12, 2016, from
https://corpgov.law.harvard.edu/2016/05/04/sec-enforcement-
and-internal-control-failures/
SEC versus Marrone Bio Innovations, INC (United States
District Court Eastern District of California Sacramento
Division February 17, 2016), from
https://www.sec.gov/litigation/complaints/2016/comp-pr2016-
32-mbi.pdf
SEC. (2016, February 17). SEC Charges Biopesticide Company
and Former Executive with Accounting Fraud [Press release].
Retrieved from https://www.sec.gov/news/pressrelease/2016-
32.html
Cohn, M. (2016, February 19). Pesticide Company Charged with
Accounting Fraud. Retrieved May 12, 2016, from
http://www.accountingtoday.com/news/audit-
accounting/pesticide-company-charged-with-accounting-fraud-
77264-1.html

8. Running Head: ASSIGNMENT 1: AUDITOR AND
REGULATORY OVERSIGHT 1
AUDITOR AND REGULATORY OVERSIGHT 7
Auditor and Regulatory Oversight
J
Dr.
University
ACC403
AUDITING
January 29, 2017
Abstract
In recent past, several public companies in an attempt to hype
their financial health have, in connivance with independent
auditors manipulated and falsified their financial statements in
blatant violation of Generally Accepted Auditing Standards
(GAAS). Such practices are not unethical, but criminal both
under common laws and federal laws as they deceive investors
and creditors in making major and critical financial decisions
based on falsehood. This paper focuses on the Accounting
scandal involving Autonomy Corporation PLC and the CPA firm
Deloitte LLP. It attempts to analyze the audit report issued by
CPA firm, ascertain the legal liability to third parties who relied

9. on the financial statements under both common and federal
securities laws and provide justification. It identifies the GAAS
violated and compares the responsibilities of Autonomy and
Deloitte. It further attempts to analyze the sanctions available
under SOX and recommends the key actions that Public
Company Accounting Oversight Board (PCAOB) should take to
hold Autonomy and or Deloitte accountable.
,
When Hewlett Packard (HP), in August 2011, said it wanted to
buy Autonomy, the British software company that specializes in
analyzing “structured” data, for $10.3 billion, many industrial
analysts thought HP had paid over the odds. HP, in November
of the same year, agreed it had been duped. HP had to write off
$8.8 billion related to Autonomy in its fourth quarter report
which was “linked to serious accounting improprieties,
misrepresentation and disclosure failures”. (The Economist,
2012, 11/2012). It is interesting to note that some of
Autonomy’s former executive anonymously disclosed that the
Autonomy had inflated its figures just before the acquisition.
Revenue was inflated by 21% in 2009, 30% in 2010, and 26% in
2011. Though revenue growth was 5% in 2010, Autonomy
reported 1707%. (The Guardian, 09/05/2014). Interestingly
Deloitte’s independent audit report on Autonomy’s financial
statements for the year ending December 31, 2010 declared that
the financial statements give a true and fair view of the
financial operations of Autonomy and that the financial
statements have been prepared in accordance with GAAS.
Deloitte did not disclose any of these material misstatements
and went ahead to state that his client’s financial statements

10. have been prepared in accordance with generally accepted
accounting principles and represents a true and fair picture of
financial transactions that took place within the accounting
period. Having relied on the audited report in deciding the
purchase of Autonomy, HP can sue Deloitte under common law,
the Ultramares doctrine, as a third party. HP can be classified as
a foreseeable user of the audited statements and have the same
rights as those with privity of contracts. Under the Securities
Act of 1933, third party users of Financial Statements like HP
“only need to prove that the audited financial statements
contained material misrepresentations or omissions.” (Arens,
Elder, Beasley, 2014). Rule 10b-b of the Securities Exchange
Act of 1934 also makes accountants liable if the intentionally or
recklessly misrepresent information intended for third-party
use. Autonomy and Deloitte intentionally misrepresented
information to make the health of Autonomy look good to
deceive potential investors like HP. Both are therefore liable.
Deloitte has violated GAAS AU150 Section 01 & 02 which
require independent auditors to “plan, conduct, and report the
results of an audit in accordance with generally accepted
auditing principles”, “maintain independence in mental attitude
in all matters relating to the audit” and “exercise due
professional care in the performance of the audit and the
preparation of the audit report” (GAAP, AU Section 150). .
Deloitte has violated GAAS AU150 Section 01 & 02 which
require independent auditors to “plan, conduct, and report the
results of an audit in accordance with generally accepted
auditing principles”, “maintain independence in mental attitude
in all matters relating to the audit” and “exercise due
professional care in the performance of the audit and the
preparation of the audit report” (GAAP, AU Section 150).
Management, in this case Autonomy, “is responsible for
adopting sound accounting policies, maintaining adequate
internal control, and making fair representations in the financial
statements”. (Arens, Elder, Beasley, 2014). Since management
deals with the day to day administration of the business they

11. stand in a better position to know the business transactions,
assets, liabilities, and equity better than the auditor. The
auditor’s knowledge of the business and its internal control is
limited to what he acquires during the audit. Management is
also responsible for the integrity and fairness of the financial
statements and must ensure that appropriate presentation and
disclosures are made. The auditor however has the
responsibility to issue an adverse or qualified report if
management insists on disclosures which the auditor finds
unacceptable or simply withdraw from the engagement. The
Chief Executive Officer (CEO) and Chief Financial Officer
(CFO) of Public companies are required under the Sarbanes-
Oxley Act to certify the annual and quarterly financial
statements submitted to SEC. By signing those statements, they
certify that the statements “fully comply with the requirements
of the Securities and Exchange Act of 1934 and that the
information contained in the financial statements fairly
represent, in all material respects, the financial condition and
results of operations”. (Arens, Elder, Beasley, 2014). The
auditor, according to the AICPA auditing standards is
responsible for discovering material misstatements due to fraud
or error, and maintain professional skepticism when conducting
the audit. The auditor is responsible for reasonable assurance
but not absolute assurance that the statements are free from
material misstatements. This is because the auditor’s work is
usually based on sampling from the population. The likelihood
that there could still be some misstatements cannot be ruled out
absolutely. That notwithstanding, it appears to me that the
auditor carries a greater responsibility in certifying the fairness
of the financial statements. As a professional, the auditor has
the skills and must exercise due care in reviewing all evidence
before issuing his report. Section 110, subsection 2 of the
PCAOB guidelines even gives the auditor additional
responsibility to notify the client’s audit committee if
management fails in its responsibilities during the audit.
Under the SEC Rules of Practice and the PCAOB Rules of the

12. Board, individual CPAs or the firm can be temporarily or
permanently suspended from auditing financial statements of
public companies because of lack of requisite qualification or
engaging in unethical or improper professional conduct. The
PCAOB can request offending CPAs to participate in continuing
education if it establishes that the individual or CPA firm
requires lacks requisite training. PCAOB can refer violating
CPAs to law enforcement agencies for appropriate disciplinary
actions. In extreme cases, PCAOB can publish names of
offending CPAs in the business press and cause major
embarrassment to them.
In conclusion, the oversight responsibilities of PCAOB and SEC
gives hope for better performance from CPAs and clients.
References
Arens, A. A; Elder, R.J; Besealey, M.S. (15th Ed. 2014).
Auditing and Assurance Services. An Integrated Approach.
Pearson Education, Inc. Upper Saddle River, New Jersey 07458
PCAOB-Generally Accepted Auditing Standards.
http://www.pcaobus.org/Standards/Auditing/Pages/AU150.
The Economist (2012, November 12): HP and Autonomy

13. Conflicting accounts. http://economist.com/node21567005/print
The Guardian, Friday, September 5, 2014
http://wwww.theguardian.com/business/2014/sep/05/hp