Financial Reporting Problems Molex Inc. Case Study Solution
After analyzing all the situations with the help of specified facts and figures, Molex’s Top management decided to do not raise this issue with the external auditors because according to them it’s an immaterial issue, which does not have any intentional conduct of misstatement or omission in the financial statements. Material issue is referred to as an intentional misrepresentation of facts and figures in order to generate huge profits. But Molex’s top management were not aware about this inventory problem primarily, this shows that they were unaware about this problem. When this problem was first identified, Molex’s top management arrange a meeting to analyze the problem thoroughly with the help of collected information and the investigation’s results suggest that it is an immaterial issue which could be resolved without mentioning it in the auditor’s addressed letter. Some other factors which resist the top management to mention this issue with the auditors is that Molex has recently cope up with the intense economic downturn and had been successful in achieving high margins. Additionally, management thinks that this issue could be resolved without mentioning it to the auditors easily and if, they will mention this issue, it will badly affect the Molex’s financial positioning in this competitive world.
Question: 3
Auditors Concerns
Audit industry is already facing with many challenges since 2002. The audit industry had led new procedures and laws in order to increase the effectiveness and the quality of audit firms. Recently, some audit firms, such as Arthur Andersen, are dissolved because of poor quality and because of misstatements and omissions. Deloitte & Touche’s also affected by this industry’s grim situation. Its most clients were accused for misstatements and frauds, and this generate huge losses in the form of damage claims. When Molex’s top management informed their issue to the auditors, Deloitte & Touche, after releasing its fourth quarter result, the auditors disagreed with them and show their concerns regarding misstatement in the financial statements. Deloitte & Touche put all of their efforts in order to resolve this issue according to the prescribed rules and laws and shows their due diligence to dig out the main reason behind the problem. Soon after, it has been identified that Molex’s top management was aware of this issue prior to the release of its fourth quarter financial results. The auditors became more concerned about this misstatement issue and demanded that this issue should be mentioned in previous reports too. Moreover, as a member of board of directors, I would not agree with the auditors, because on one hand, it is an immaterial issue which could be resolved without arising any issues. On the other hand, it will badly affect the Molex’s financial positioning and eventually lead towards decreased stock price.
Question: 4
Recommendations
As the member of Molex’s board of director, I would recommend that Molex should satisfy its auditors first by removing CEO and CFO from executive positions, in order to file its quarterly financial results on time with the audit institutions. Molex has limited time frame to decide because it has to file its quarterly results. To hire a new auditor at this time will require permission from SEC, which is time consuming and hence Molex will not be able to furnish its quarterly reports. Moreover, forcing the auditors for refusing to audit its statements at that time is also risky and it will lead toward not furnishing its quarterly reports on time. So, it is recommended that Molex should temporarily replace its CFO and CEO with a new management. Additionally, keeping them at lower positions in order to facilitate with their expertise services.
Conclusion
Molex Inc. was established in 1938. Molex Inc. produces and distributes its electronic connectors with the extensive range of products to different electronic companies globally. Molex Inc. has worldwide production and distribution channels, which make Molex Inc. the second largest company in the electronic connector industry, with a worldwide market sharing share of 6.9%.A potential accounting problem has been identified in Molex Inc. during the mid of July 2004. The problem is mainly related with the inventory sales between Molex subsidiaries, which subsequently overstated the Molex’s earnings, inventory and retained earnings.The management thinks that this problem is immaterial because the earnings were generating from inside the company as compared to outside the company. When Molex’s top management informed their issue to the auditors, Deloitte & Touche, after releasing its fourth quarter result, the auditors disagreed with them and show their concerns regarding misstatement. So, it is recommended that Molex should temporarily replace its CFO and CEO with a new management. Additionally, keeping them at lower positions in order to facilitate with their expertise services……………
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