Solved! Dell Inc Case Questions

Define the phrase “earnings management.” Under what conditions if any, is earnings management acceptable? Do auditors’ responsibilities include actively searching for instances of earnings management by clients? Defend your answers.

Dell recorded the exclusivity payments as an offset or reduction to its operating expenses. What “management assertion” did that accounting treatment violate? What audit procedure or procedures might have resulted in the discovery of that accounting treatment?

During the time frame that Intel was making exclusivity payments to Dell, Dell’s business model was being adversely affected by the increasingly competitive nature of the PC industry. What responsibility, if any, do auditors have to analyze a client’s business model? Do auditors have a responsibility to track and analyze key developments in a client’s industry? Defend your answer.

What ethical issues do exclusivity agreements such as that between Dell and Intel raise? Are there analogous ethical issues faced by audit firms and their clients? Explain.

Expert A+ Answer

Define the phrase “earnings management.” Under what conditions if any, is earnings management acceptable? Do auditors’ responsibilities include actively searching for instances of earnings management by clients? Defend your answers.

I agree with your discussion regarding earnings management; earnings management is the intentional manipulation of a company’s earnings by the misuse of accounting methods to gain benefit. It provides misleading information on the financial health of the organization. It is not acceptable under any circumstances.

“Similarly, in 1998, then Chair of the US Securities and Exchange Commission (SEC), Arthur Levitt, warned that earnings management erodes investor confidence and undermines credibility of the financial markets, a view that is also reflected more recently by the SEC.” [ CITATION ].

The purpose of an audit is to provide an opinion to users of financial statements that the financial statements are presented fairly.

Auditors are assigned primarily to increase confidence that financial statements fairly represent the financial position of a firm. Earnings management may distort this “fair presentation” and be a real concern to auditors. Moreover, auditors will become more worried when management use questionable accounting practices. [ CITATION l

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Whereas, the auditor has the responsibility to maintain professional skepticism which allows the auditor to be alert to the possibility of misstatement due to errors and/or fraudulent activity.

The book of Proverbs reads, “The integrity of the upright guides them, but the crookedness of the treacherous destroys them. (Proverbs 11:3). The biblical principles exemplify guidelines that can followed in order to achieve good ethical behavior.

The Bible exhibits high moral standards similar to those a business profession should achieve; in which, it holds Christians accountable for doing the right thing. Whereas, management can follow the God of Word to exemplify high moral standards. “All Scripture is breathed out by God and profitable for teaching, for reproof, for correction, and for training in righteousness, that the man of God may be competent, equipped for every good work.” (2 Timothy 3:16-17 ESV). Whereas, it is the duty of Christians to abide by the Word of God.

Dell recorded the exclusivity payments as an offset or reduction to its operating expenses. What “management assertion” did that accounting treatment violate? What audit procedure or procedures might have resulted in the discovery of that accounting treatment?

Management violated the valuation, allocation and accuracy assertion, as you mentioned. It has also violated the presentation and disclosure assertion. SAS 31 states “assertions about presentation and disclosure deal with whether particular components of the financial statements are properly classified, described, and disclosed.” [ CITATION ]. Auditors should obtain information regarding the organization they are auditing in order to have a better understanding. In addition, the auditor must review the industry to identify key risk factors that may impact the organization. They need to inquire into the organization’s application of accounting policy and any changes that have been made to the policies. The auditor is responsible for determining the presentation and disclosure of all accounts is appropriate. This includes investigating to ensure all accounts are properly accounted for. Appropriate documentation must be obtained in order to support the accounts.

During the time frame that Intel was making exclusivity payments to Dell, Dell’s business model was being adversely affected by the increasingly competitive nature of the PC industry. What responsibility, if any, do auditors have to analyze a client’s business model? Do auditors have a responsibility to track and analyze key developments in a client’s industry? Defend your answer.

I agree with your discussion on auditing standard no. 12. An organization’s business model describes items such as strategies, organization structure, trading practices, policies, and culture. Analyzing the model will provide an auditor with an understanding of the client which will aid in the risk assessment process.

Inherent risk and control risk are of particular interest when initially assessing whether or not to accept a company as a client. Generally, risks that are over financial reporting are referred to as control risk. These risks and overall client business risk are evaluated by an audit firm to determine whether it has the ability to conduct an audit in terms of its business risk.

[ CITATION ]

In order to fully understand the organization, the auditor must have an understanding of the industry regulations and other factors that impact the client. A comparison of the industry can determine material differences that elevate audit risk.

      What ethical issues do exclusivity agreements such as that between Dell and Intel raise? Are there analogous ethical issues faced by audit firms and their clients? Explain.

You made some sound points regarding exclusivity agreements; whereas, the agreement gives the buyer an unfair advantage. This advantage results in increased costs for the competitor and limits the number of customers willing to pay a higher price. “Under exclusivity agreements, we understand agreements between a seller and buyer whereby the buyer commits not to make any purchases from (or only to make a limited share of purchases with) a competing seller.” [ CITATION ]. This could create a monopoly which may result in legal consequences. For example, Cardinal Health recently agreed to pay $26.8 million to resolve charges it illegally monopolized 25 local markets for the sale and distribution of low-energy radiopharmaceuticals and forced hospitals and clinics to pay inflated prices for these drugs.

Works Cited

Barghathi, Y., Collison, D., & Crawford, L. (2018). Earnings management and audit quality: stakeholders’ perceptions. Journal of Management and Governance, 22(3), 629-659.

Beaudoin, C. A., Cianci, A. M., & Tsakumis, G. T. (2015). The Impact of CFOs’ Incentives and Earnings Management Ethics on their Financial Reporting Decisions: The Mediating Role of Moral Disengagement. Journal of Business Ethics, 128(3), 505-518.

Hajnovicova, R., Lang, N.-L., & Usai, A. (2019). Exclusivity Agreements and the Role of the As-Efficient-Competitor Test After Intel. Journal of European Competition Law & Practice, 10(3), 141-158.

Johnson-Snyder, A. J., & Chandrasekran, R. (2017). Acceptance Or Rejection Of An Audit Client: Understanding Risk In The Auditing Environment. Journal of Business Case Studies, 13(2), 49-58.

Rouse, R. W. (2017). Our Greatest Hits| The five assertions: Categories of assertions about which auditors must collect adequate evidence to support financial statement items. The CPA

Journal.

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