Accounting Irregularities: FTE Networks Inc.
Week 4 Assignment 2 - Auditors and Regulatory Oversight
Overview
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 Strayer Library to research a recent accounting scandal within the last five years where the SEC accused public companies of accounting irregularities.
Instructions
Write a 3–4 page paper in which you:
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.
Speculate on which statement of generally accepted auditing standards (GAAS) that the company violated in performing the audit.
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.
Analyze the sanctions available under SOX, and recommend the key action or actions 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.
Use the Strayer Library to locate at least two quality academic resources in this assignment. Note: Wikipedia and other similar websites do not qualify as academic resources.
This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course. Check with your professor for any additional instructions.
The specific course learning outcome associated with this assignment is:
Recommend sanctions for accounting irregularities based on an audit report, auditing standards, and financial reporting responsibilities.
FTE Networks Inc.
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FTE Networks Inc.
The Securities and Exchange Commission (SEC) usually regulates public firms by identifying the enterprises that have violated the Generally Accepted Accounting Principles (GAAP) to mislead creditors and investors about the company’s health. In July 2021, the SEC charged the former chief executive officer (CEO), Michael Palleschi, and chief financial officer (CFO), David Lethem, of a network infrastructure firm called FTE Networks Inc. In particular, the scheme involved inflating FTE Networks Inc.’s revenues for specific periods by around 108% (1). Based on the audit report that the certified public accountant firm provided, it was clear that FTE Networks Inc.’s CEO was engaged in the scheme of manipulating the company’s financial statements under both federal and common securities laws. The paper focuses on FTE Networks Inc.’s accounting irregularities or malpractices that contributed to misleading the firm’s stakeholders about its financial position.
Based on the SEC’s investigation, the audit report of FTE Networks Inc. portrays the legal liability of the CEO’s and CFO’s decision to manipulate the financial statements of the company to lure investors and creditors about the firm’s financial health. Notably, it is against the GAAP to inflate the revenues of a company for certain fiscal periods, hide the NYSE publicly traded firm’s issuance of around $23 million by making its convertible notes, and misappropriate millions of FTE Networks Inc.’s money for personal use (1). Lethem and Palleschi were found guilty of directing the company to issue convertible notes that had short-term maturities, market-price-based formulas for shares conversion, and steep interest rates. The two executive leaders misled the internal accounting personnel of FTE Networks Inc. and the external auditors about the terms of the convertible notes. They directed the firm to improperly recognize revenues and other related accounts receivable for construction projects that did not exist. In other words, they lied by creating non-existent projects as these individuals tried to convince auditors about the misappropriated funds. FTE Networks Inc.'s CEO and CFO did not comply with federal and common securities laws. Instead, they misappropriated millions of FTE Networks Inc.’s finances to cater to their personal expenses, such as luxury private jet services, car leases, and increasing salaries in an unauthorized way.
FTE Networks Inc. violated the generally accepted auditing standards (GAAS) when performing the audit. Specifically, the GAAS comprises systematic guidelines that are used by auditors to audit the financial records of companies to facilitate consistency, accuracy, verifiability, and reliability of the firm’s financial statements. In this scenario, the CEO and CFO should be held responsible since they had planned and knew the scheme of manipulating the company’s financial statements. For instance, these executive leaders fraudulently inflated FTE Networks Inc.’s revenues to depict a false picture of financial health (2). They misappropriated millions of dollars to fund their luxurious lifestyles, including car leasing and private jet services. The SEC found these individuals accountable since they directly violated or aided fraudulent schemes and failed to adhere to GAAS. Lethem and Palleschi engaged in accounting malpractices knowingly. They protected themselves by providing wrong financial information to internal and external auditors so that they would conceal the fraud. In that light, when the financial audit was performed during their tenure no irregularities were found since they manipul...