Introduction
WoolEx Mills was the victim of fraud in high positions, which naturally affected both the financial performance and the company’s reputation, despite stable growth. This organization increased sales and entered international export markets, but internal turmoil, lack of budget optimization, development vector, and long-term receivables drove WoolEx Mills into losses (Alvarez & Marshall, 2015). It was enough for one statement from a former employee to involve private detectives in work and find out all the circumstances as delicately as possible. Management fraud resulted in the absence of any financial control systems and, as a result, ensured a failed audit. However, the company itself was in the development stage, increasing the volume and geography of sales, which signaled that it had good potential with proper management. This paper examines the preventive measures concerning this case and the impact on the audit profession.
Analysis of Fraud that Occurred
In this case, the financial analysis showed that the company, despite growing sales and turnover, had highly high durations of receivables, lasting around 130 days in total. This fact deprived WoolEx Mills of the necessary amount of current assets, and available ones was not used effectively: the example of a six-month supply of coal confirms this fact (Alvarez & Marshall, 2015). Financial losses naturally lead to the loss of investors, and the outflow of other types of assets, in connection with which the fraud, if possible, was hushed up by representatives of A&M. It can be concluded that this type of misconduct refers to the misappropriation of assets and financial reporting fraud. Under these circumstances, specific preventive measures are required.
The company has the potential within which it is possible to optimize certain costs, significantly reducing the cost of goods sold with such a volume. As a result, the gross profit ratio will increase, and WoolEx Mills will be able to take a course to correct the situation and reach a plus based on all expenses, thereby attracting investors. These changes should lead to an increase in net profit; at the same time, the footprint left by the previous management must be converted into experience, and fraud prevention mechanisms should be created. First, the first thing A&M did was right to fire all the employees involved in the scheme. Secondly, the company does not have any control and reporting systems, which are also the goal of an independent audit. This problem can be solved by introducing delegation and the chain of processes for passing all financial transactions and their reporting through several employees, each of whom may notice inconsistencies. In addition, the rotation of employees is often used as a practice, resulting in which one checks the actions of another. This event should be carried out in cases where there are concerns or suspicions: for example, if the employee has not taken a vacation for a long time.
At the same time, when creating an internal control system, it should be remembered that the direct prevention of fraud should ultimately be the responsibility of specialists and not employees within the company. First of all, it is necessary to revise the document management system, the structure, and the periodization of reports. Reconciliation and management monitoring are not the most expensive but very effective means of combating such offenses and immediately demonstrating problems. In addition, continuous monitoring of security trends should be carried out in conjunction with risk management training. Finally, the most effective way, but at the same time the most expensive, is to invest in special software with built-in audit control systems. As a result, several financial statements are introduced at each level, which virtually eliminates the risk of error.
Therefore, the main recommendations are to implement the practice of reconciliation and management monitoring to prevent fraud at different levels. Since the management identified the offense in this case, it is proposed to immediately introduce special software and an accountability structure for document management on financial activities at different levels, which worked and gave access to information independently of various departments. Nevertheless, it is still required to carry out external audits on a scheduled and unscheduled basis and to involve professionals to disclose detected fraudulent schemes.
Impact and Auditor Responsibility
From the point of view of auditing standards, the uniqueness of this case lies in the fact that senior management turned out to be disinterested in the company’s development for the sake of personal interests. Consequently, the internal control systems, already in a bad state, were left without a reliable, independent party of verification, which should, as a rule, be interested in the success of the company. Consequently, without exception, all departments suffered primarily financially, which created a lack of technological and geographical development resources.
The legal aspect of this case, which distinguishes it from others, was the company’s takeover, which was carried out at first secretly, followed by the disclosure of the case, the confiscation of equipment by hand, and personal notification to each employee of the change in leadership. Involving A&M as the company investigating the fund was the right decision, especially when the grounds for suspicion were confirmed. A&M’s actions may seem legal and drastic, but the company acted within the law and in the interests of potentially affected parties in the form of employees, customers, and investors of WoolEx Mills.
On the social side of the issue, the rescue of this organization was required from the point of view of responsibility to employees, customers, and end buyers of the inexpensive clothing segment. India is still a developing country, so the exit of such a large firm from the market would allow competitors to increase their prices. In this case, this kind of responsibility lies with the auditor, as an independent expert, on whose decision many interests depend. The company’s investment attractiveness will be evaluated primarily by unbiased expert assessments, which also affect the further development of the organization.
Conclusion
Economically, WoolEx Mills is an up-and-coming company that has maintained sales growth despite fraud and lack of development spending. Products occupy a market segment with high demand due to the affordable price, which is compensated by turnover and sales volumes, including imports. Given that entry into the international arena has already taken place, the development of WoolEx Mills is a matter of time with proper management decisions and control systems. Honest work instead of fraud would have brought much more long-term and sustainable success to the former management. Regarding the impact on the profession, through such cases, auditors become aware of patterns of an offense under the control of senior management, explore new opportunities to improve the security of power, and eliminate possible loopholes in financial reporting.
Reference
Alvarez & Marshall. (2015). Crisis at the Mill: Weaving an Indian Turnaround. Insead. Web.