Review The Cardillo Travel Systems Case In Your Textbook

Review TheCardillo Travel Systems Case in Your Textbook and Analyze

Review the Cardillo Travel Systems case in your textbook. Write a four to five (4-5) page paper in which you:

1. Explain the Securities and Exchange Commission's rationale to charge Cardillo executives with each of the following violations: making false representations to outside auditors, failing to maintain accurate financial records, failing to file prompt financial reports with the SEC, violating the insider trading provisions of the federal securities laws.

2. Determine who was in violation or compliance of the AICPA's Code of Professional Conduct in this case study and analyze the key reasons why they were or were not in compliance. Provide support for the rationale.

3. Analyze the actions taken by Cardillo's outside auditors and evaluate the level of efficiency of the audit risk management in this case study. Provide support for the rationale.

4. Determine whether or not the five (5) components of internal control were being followed. Support the response with at least two (2) examples.

5. Create an argument for or against whether auditors have a responsibility to assess the judgment of the decisions made by Cardillo's management. Support the argument.

6. Use at least two (2) quality academic resources in this assignment. Note: Wikipedia and similar type websites do not qualify as academic resources. Your assignment must follow these formatting requirements: Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions. Include a cover page containing the title of the assignment, the student's name, the professor's name, the course title, and the date.

Paper For Above instruction

The case of Cardillo Travel Systems presents significant ethical, compliance, and audit challenges illuminating the responsibilities of corporate executives, auditors, and regulators in safeguarding financial integrity. Analyzing this case from multiple perspectives reveals critical insights into securities law violations, compliance with professional conduct standards, internal control processes, and the scope of auditors' responsibilities.

SEC's Rationale for Charging Cardillo Executives

The Securities and Exchange Commission (SEC) charged Cardillo executives with multiple violations rooted in deceptive and criminal conduct aimed at misleading investors and regulatory authorities. First, making false representations to outside auditors involved intentionally providing inaccurate or incomplete financial information to conceal financial mismanagement or fraud. Such actions undermine the core trust essential for capital markets (SEC, 2021). Furthermore, failures to maintain accurate financial records reflect negligence or intentional misconduct in recordkeeping, violating securities laws that mandate truthful and reliable reporting. These inaccuracies hinder regulatory oversight and distort shareholders' understanding of company performance.

In addition, failing to file prompt financial reports with the SEC directly impairs timely disclosure, potentially allowing insiders to profit from unrevealed financial issues or misstateings. Finally, violating insider trading provisions involves executives exploiting undisclosed material information for personal gain, disrupting market fairness and integrity (FASB, 2020). The SEC's rationale thus centered on protecting investors, ensuring transparency, and enforcing compliance with federal securities laws.

Compliance with AICPA’s Code of Professional Conduct

The case highlights significant breaches of the American Institute of CPAs (AICPA) Code of Professional Conduct. The key principles involved include integrity, objectivity, professional competence, confidentiality, and professional behavior (AICPA, 2014). Several individuals breach these principles by engaging in fraudulent financial reporting or failing to maintain objectivity, especially if they had conflicts of interest or pressures to distort financial results.

For example, the senior management likely violated integrity and professional behavior by deliberately misrepresenting financial results to inflate company performance. Conversely, certain auditors may have complied with the standards if they exercised due diligence and skepticism, although this is questionable given their potential complicity or oversight failures in detecting fraud.

Evaluation of Auditors’ Actions and Risk Management

The external auditors' response in the Cardillo case demonstrates a concerning level of inefficiency in audit risk management. Effective audits require a comprehensive understanding of internal controls, risk assessment procedures, and skepticism to detect fraud (Kranacher et al., 2011). In this case, the auditors failed to recognize signs of financial misstatements or irregularities, indicating deficiencies in their audit planning and execution.

For instance, the auditors did not implement sufficient procedures to verify the authenticity of financial records or assess management's integrity thoroughly. This lapse resulted in a failure to identify material misstatements, thus compromising the audit’s effectiveness. It underscores the need for auditors to employ advanced risk assessment techniques and maintain professional skepticism to safeguard the integrity of financial reporting.

Internal Control Components Analysis

The five components of internal control—control environment, risk assessment, control activities, information and communication, and monitoring—were not adequately followed in the Cardillo case. For example, the control environment was compromised when management set a tone fostering unethical behavior, as evidenced by the financial misstatements. Additionally, the lack of effective control activities, such as reconciliations or review procedures, allowed the fraud to persist unnoticed for an extended period (COSO, 2013).

Another example involves weak monitoring systems, which failed to detect or report anomalies. These deficiencies collectively created an environment conducive to financial manipulation, demonstrating significant gaps in internal control processes.

Auditors’ Responsibility in Management Judgment

There is a strong argument that auditors have a responsibility to assess the judgment and decision-making processes of management critically. Auditors serve as gatekeepers, tasked with evaluating whether management’s estimates and decisions are reasonable and supported by evidence (Whittington & Pany, 2019). In the Cardillo case, auditors should have questioned management’s assumptions, scrutinized internal controls related to financial estimates, and considered red flags indicating possible fraudulent activity.

Proper assessment of management judgment ensures that financial statements provide a true and fair view, fostering transparency and accountability. Arguably, auditors failed in this aspect, allowing fraudulent decisions to escape scrutiny and reach the financial statements, ultimately harming stakeholders and the market at large.

Conclusion

The Cardillo Travel Systems case underscores the importance of rigorous regulatory oversight, adherence to professional standards, and diligent audit practices. The violations of securities laws highlight the critical need for strong checks and balances within corporate governance. Moreover, the deficiencies in internal controls and audit risk management emphasize ongoing challenges auditors face in detecting and preventing financial misconduct. Ensuring that auditors actively evaluate management’s judgments remains essential in maintaining market integrity and investor confidence.

References

• American Institute of CPAs (AICPA). (2014). Code of Professional Conduct. AICPA.
• COSO. (2013). Internal Control—Integrated Framework. Committee of Sponsoring Organizations of the Treadway Commission.
• Financial Accounting Standards Board (FASB). (2020). Accounting Standards Codification Timeline. FASB.
• Kranacher, M. J., Riley, R. A., & Well, J. T. (2011). Forensic Accounting and Fraud Examination. Wiley.
• Securities and Exchange Commission (SEC). (2021). Enforcement Actions. SEC.gov.
• Whittington, R., & Pany, K. (2019). Principles of Auditing & Assurance Services. McGraw-Hill Education.