Nextcard Inc.

NEXTCARD AUDIT MANIPULATION Name Institution Affiliation Course Date of Submission Introduction The central function of that is served by auditors is independence, but managers may be having interest in exaggerating, misrepresenting, and falsifying reports with respect to the performance of a firm. It is thus, imperative for an independent audit report to provide credible and unbiased appraisal regarding a firm’s financial status. Numerous legal decisions have reinforced the code of professional ethics to reflect the significance of independence of auditors. The issue of auditor independence is analyzed sometimes explicitly or implicitly that the auditor’s bias is a matter of choice, as they are assumed to have the ability to conduct high quality and unbiased audits (Antle, 1984). Biasness is perceived to be a deliberate response to incentives due to conflict of interests that become impossible for auditors to avoid. The evaluation of evidence is in a selective manner when auditors have a stake to reach a particular conclusion, which makes them to focus on evidence that supports their conclusion evaluating the evidence in uncritical manner. The presentation of conflict by the evidence present and the desired conclusion, results to either auditors ignoring it or subjecting the conflict to a particular critical scrutiny (Antle, 1984). The processing of information is strong to the people exposed to the information as it holds their position. Accountability y influences people to evaluate information showing concerns regarding how their decisions will be received. The failure of auditors to understand their audience preference results to a systematic cognitive processing coupled with a thorough justification of their conclusion (Diekmann, 1997). There is little doubt with respect to audience preference of the client firm to get unqualified audit report, but the effect of accountability does not include rewards for consenting with individuals who are accountable. Thus, self-interest does influence judgments if the interpretation of the evidence benefits them materially, even if their explicit goal is being impartial. There is a perception that allocation of resources to benefit their self-interest is fair, with a belief that their perspective will be shared with others. The information they are processing is typically serving their self-interests and they are unaware of them being biased (Knapp, 2012). There are many risk factors in audit reports that face the auditors in a range of situations. The fraudulent financial reporting arises from misappropriation of assets and there are general conditions t hat leads to material misstatements that include: incentives, opportunities and attitudes (Jenkins, 1998). Although t he risk factors cover great range of situations t here are risk factor t hat auditors identify which have significance in firms circumstances. The economic threat to financial stability and profitability due to high degree of competition and rapid changes was the main risk factor in NextCard Inc. There were many risk factors that were present during the 2000 NextCard audit: the management of NextCard did unusually report rapid growth and profitability of the company although there were significant related-party transactions, worsening financial condition (Knapp Nextcard Case, 2010). This is where the management guaranteed debt, and still the management had to use aggressive accounting measures in an effort to boost stock price. NextCard, Inc has respectively demonstrated that these risks which were extending up to $1 billion of credit to its customers with an average balance of $2000.   The firm’s executives had to sell-off large portions of their ownership in the company before the firm’s financial condition became apparent (Knapp Nextcard Case, 2010). In 1999 the company had incurred a loss of $77.2 billion followed by an $81.9 billion loss in 2000, but NextCard’s executive chose to conceal the company's financial problems, and the management materially had to manipulate the financial statements in order to attract investors (Knapp, 2012). The executives of the company did also find an opportunity by manipulating the financial stat...