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A competent auditor has done a conscientious job of auditing Hercules Corporation, but because of a
clever fraud by management, a material fraud is included in the nancial statements. The fraud, which is
an overstatement of inventory, took place over several years, and it covered up the fact that the
company's nancial position was rapidly declining. The fraud was accidentally discovered in the latest
audit by an unusually capable audit senior, and the SEC was immediately informed. Subsequent
investigation indicated Hercules Corporation was actually near bankruptcy, and the value of the stock
dropped from $35 per share to $1 in less than one month. Among the losing stockholders were pension
funds, university endowment funds, retired couples, and widows. The individuals responsible for
perpetrating the fraud were also bankrupt.

After making an extensive investigation of the audit performance in previous years, the SEC was
satis ed that the auditor had done a high-quality audit and had followed generally accepted auditing
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standards in every respect. The commission concluded that it would be unreasonable to expect auditors
to uncover this type of fraud. You can ask 1 question (will expire 숅)

Who should bear the loss of the fraudulent nancial reporting? Include in your discussion a list of
potential bearers of the loss, and state why you believe they should or should not bear the loss

Answered by Expert Tutors 숦

The group of persons that should bear the loss of the fraudulent reporting or the liability includes the
governing board, the executive and management, the accountants and employees who had direct link
with the fraud.

Step-by-step explanation

As stated in the above information, certain types of fraud are hard for auditors to detect. The
primary responsibility of detecting and preventing fraud rests with the governing board and the
management. The governing board in particular has a duciary duty towards the shareholders
who elected them. As such, in situations whereby there's been fraud the board should be
investigated to determine who among the board members was linked to the fraud.
The corporate leaders, the CEO and the executive leaders including the management, should also
be held accountable. They are also responsible for detecting and preventing fraud. The failure in
the company shows that they were aware things were bad and instead pushed for misstatements
in order to present the position of the rm to be good while in the real case it was not. In issues of
fraud, this is the primary party that also needs to be investigated and be held liable for the loss.
The accountants, internal CPAs, who are responsible for preparing the nancial statements
should also be held liable. This is the party that is directed to manipulate the nancial records and
as certi ed accountants they ought to overcome such issues by practicing independence. For
taking part in the fraudulent nancial reporting knowingly, the accountants should be held liable.
Any other employee linked to the fraud should be held liable. If any employee participated in
aiding the fraud and had the knowledge of what was going on but failed to report they can be
held liable for the loss. There are employees who are not accountants but they are involved in the
recording of nancial transactions or the processing of transactions. If an employee is aware but
is negligent, they should be held liable.

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Subject: Business, Management

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