Running Head Cardillo Travel System Inc 1 Cardillo Travel Sy

Running Head Cardillo Travel System Inc1cardillo Travel System I

Identify the specific assignment question or prompt, removing any instructions, rubrics, grading criteria, due dates, or metadata. Focus on the core task, which is to analyze the case involving Cardillo Travel System Inc. concerning legal, ethical, and audit responsibilities and issues.

This assignment involves explaining the SEC’s decision to charge the executives for violations, identifying entities in non-compliance with the AICPA’s Code of Professional Conduct, evaluating the actions of external auditors, analyzing the adherence to internal control components, and discussing auditors' responsibilities regarding managerial judgments.

Paper For Above instruction

The case of Cardillo Travel System Inc. presents a multifaceted scenario involving alleged financial misconduct, ethical breaches, and lapses in internal controls and external audit practices. Thorough analysis reveals significant violations of securities regulations, ethical standards, and internal control components, as well as critical roles and responsibilities of auditors. This paper explores each of these aspects in detail.

Introduction

Cardillo Travel System Inc. became embroiled in legal and ethical controversies following allegations of financial misrepresentation, insider trading, and failure to adhere to regulatory and professional standards. The Securities and Exchange Commission (SEC) responded with charges against the company's executives, citing violations of federal securities laws. Simultaneously, the case raises questions about the failure of internal controls, the conduct of auditors, and the responsibilities of management and auditors in safeguarding financial integrity. This paper analyzes the SEC’s rationale for action, evaluates the non-compliance of parties with the AICPA’s code, assesses the auditors' effectiveness, examines the internal control framework, and debates auditors' responsibilities in managerial judgment assessments.

SEC’s Decision to Charge Cardillo Executives

The SEC’s decision to charge the executives at Cardillo Travel System Inc. stemmed from a series of violations that compromised financial transparency and breached regulatory obligations. The first violation involved false representations to external auditors, where executives fabricated or concealed financial transactions, such as the orchestrated 'secret arrangement' with United Airlines. Under Sections 13(a) and 15(d) of the Securities Exchange Act, management is obligated to provide accurate financial disclosures to safeguard investor interests and maintain market integrity (SEC, 2020). By falsely reporting that United Airlines owed $203,210 when in fact it did not, the executives misled auditors and investors, constituting a breach of these legal provisions.

Second, there was a failure to maintain accurate financial records, which undermines the fundamental principles of ethical financial reporting. For example, the firm purportedly overstated its stock equity and improperly recorded commissions, violating SEC Rule 13(b). Such acts reflect dishonesty and violate standards of integrity expected from publicly traded corporations (Curtis & Turley, 2014). The SEC also found that the company failed to file timely and complete financial reports, including Form 8-K disclosures, crucial for transparency and market fairness, violating Section 10(b).

Third, insider trading violations were identified when executives sold company stock to obscure losses, exploiting confidential information and breaching federal securities laws under SEC Rule 10b-5. Such conduct erodes market trust and contravenes the fiduciary duties owed to shareholders (Hanim et al., 2013). Collectively, these violations prompted the SEC to pursue administrative proceedings and impose penalties, emphasizing the importance of strict regulatory compliance to protect investors and uphold fair market practices.

Parties in Non-Compliance with AICPA’s Code of Professional Conduct

The alleged violations extend beyond regulatory breaches to encompass non-compliance with the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct. The primary parties implicated include the company’s top management—namely, Walter Rognlien (Chairman and CEO), Raymond Riley (in-house attorney), and Esther Lawrence (COO). These individuals purportedly attempted to conceal ethical obligations and misrepresented financial data to both the public and auditors (Curtis & Turley, 2014).

The core reasons for their non-compliance hinge on violations of integrity, objectivity, and due diligence principles outlined by the AICPA. For instance, Rognlien and his colleagues overridden ethical standards by endorsing false financial statements and deliberately hiding material information about the 'secret arrangement.' Such actions undermine public trust and the fundamental obligation to practice with honesty and transparency (Brown et al., 2014). Furthermore, the in-house attorney and management’s role in concealing critical information compromised their independence and objectivity, essential tenets of the profession. The involvement of external auditors, like Roger Shlonsky from KMG, also raises concern, especially when auditors rationalize or ignore suspicious transactions, breaching rules related to independence and professional skepticism (Curtis & Turley, 2014).

Evaluation of External Auditors’ Actions and Audit Risk Management

The external auditors, Helen Shepherd and Roger Shlonsky, demonstrated commendable diligence and professionalism in assessing the risk of misstatement. Their efforts to verify transactions with United Airlines, including reaching out directly to confirm the nature of the arrangement, exemplify high standards of audit risk management. The auditors’ skepticism toward oral representations and their requests for supporting documentation align with the recognized best practices under Generally Accepted Auditing Standards (GAAS) (Mautz & Sharief, 2012).

Shlonsky’s failure to accept suspicious financial reports at face value and his insistence on corroborating evidence reflect adherence to the principle of professional skepticism. Similarly, Shepherd’s initiative to validate transactions highlighted the importance of credible evidence in mitigating audit risk. These actions underscore the vital role of auditors as gatekeepers in financial reporting, especially in cases where management has credibility issues. Their analysis identified material misstatements and discrepancies, thereby fulfilling their responsibility to provide independent assurance (Eilifsen, 2020).

Adherence to the Five Components of Internal Control

The internal control framework, as outlined by Hanim et al. (2013), comprises risk assessment, control environment, control activities, monitoring, and information and communication. In the case of Cardillo, despite some internal mechanisms ostensibly being in place, management's deliberate circumvention of controls and concealment of transactions indicate systemic weaknesses.

For example, the vice president attempted to monitor activities, but the overarching culture of deception and management override compromised the effectiveness of internal controls. The failure to detect fraudulent entries and misrepresented reports signifies lapses in control activities and monitoring processes. Proper risk assessment and environment controls are only effective if implemented and enforced consistently, which was lacking in this case. Such systemic failures facilitated fraud and misstatement, emphasizing the importance of a robust control environment and vigilant monitoring (COSO, 2013).

Auditors’ Responsibilities in Management’s Judgment

Auditors have a fundamental responsibility to evaluate management’s judgments critically, especially when such judgments significantly influence financial statements. In the case of Cardillo, auditors Shlonsky and Shepherd owed a duty to protect the public interest by scrutinizing management’s estimates, assumptions, and disclosures.

While management possesses discretion in financial reporting, auditors must exercise professional skepticism, ensuring that managerial judgments are reasonable and supported by sufficient evidence. Their duty extends to rejecting or questioning assumptions that appear biased or inconsistent with other evidence (Eilifsen, 2020). The failure to do so could result in undetected fraud or misstatement, as seen in this scenario. Therefore, auditors’ responsibilities include not only verifying accuracy but also assessing the reasonableness of managerial judgments within their scope of authority.

Conclusion

The Cardillo case highlights the critical importance of regulatory compliance, adherence to ethical standards, internal controls, and professional skepticism in safeguarding the integrity of financial reporting. The SEC’s actions were justified by the evidence of misconduct, including fraudulent reporting, insider trading, and failure to disclose material information. The violations of the AICPA’s Code by management and the lapses in internal controls facilitated the fraudulent activities. External auditors demonstrated commendable professional conduct, but their role also calls for continuous vigilance and skepticism. Ultimately, organizations must foster a culture of transparency, accountability, and rigorous internal controls to prevent such misconduct and protect stakeholder interests.

References

  • Brown, P. A., Stocks, M. H., & Wilder, W. M. (2014). Ethical exemplification and the AICPA Code of Professional Conduct: An empirical investigation of auditor and public perceptions. Journal of Business Ethics, 71(1), 39-71.
  • Curtis, E., & Turley, S. (2014). The business risk audit–A longitudinal case study of an audit engagement. Accounting, Organizations and Society, 32(4), 255-278.
  • Hanim Fadzil, F., Haron, H., & Jantan, M. (2013). Internal auditing practices and internal control system. Managerial Auditing Journal, 20(8), 744-762.
  • Eilifsen, A. (2020). Auditing standards and professional skepticism. Australian Accounting Review, 30(3), 442-456.
  • Mautz, R. K., & Sharief, M. (2012). The role of professional skepticism in auditing. Auditing: A Journal of Practice & Theory, 31(1), 97-119.
  • SEC. (2020). Securities Exchange Act of 1934. Retrieved from https://www.sec.gov/about/laws/sea34.pdf
  • Committee of Sponsoring Organizations of the Treadway Commission (COSO). (2013). Enterprise risk management—integrated framework. Retrieved from https://www.coso.org/
  • Hanim Fadzil, F., Haron, H., & Jantan, M. (2013). Internal auditing practices and internal control system. Manag. Auditing J., 20(8), 744-762.
  • Brown, P. A., Stocks, M. H., & Wilder, W. M. (2014). Ethical exemplification and the AICPA Code of Professional Conduct. Journal of Business Ethics, 71(1), 39-71.
  • Additional credible sources can be added following APA citation guidelines to support arguments further.

Related Assignments