chapter 8-1 prepared by coby harmon university of california, santa barbara westmont college
TRANSCRIPT
Chapter 8-3
1. An introduction to revenue processes
2. Sales processes and the related risks and controls
3. Sales return processes and the related risks and controls
4. Cash collection processes and the related risks and controls
5. An overview of IT systems of revenue and cash collection that enhance the efficiency of revenue processes
6. E-business systems and the related risks and controls
7. Electronic data interchange (EDI) systems and the related risks and controls
8. Point of sale (POS) systems and the related risks and controls
9. Ethical issues related to revenue processes
10. Corporate governance in revenue processes
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Chapter 8-4
Staples®, the large office supply company, sells not only in retail stores, but also to other large corporations. Top
management at Staples realizes that these corporate sales are dependent upon customers’ satisfaction with their buying experience. Staples must have sales processes that maximize customer satisfaction, because the sales processes are what make up the buying experience. However, customer satisfaction depends on the whole range of activities from ordering, to product delivery, to efficient billing and collection, and facilitation of product returns. Staples must have, monitor, and improve all of the internal processes that generate the sale, deliver to the customer, and collect the payment. These processes must be able to handle
walk-in sales, telephone orders, and web orders. To improve performance in filling customer orders and collecting the cash, Staples monitors the following performance measures:
• Order entry accuracy • Order fill rate versus unit fill rate
• Percent of items mispicked • Percent of orders delivered next day
• Products delivered undamagedTo perform efficiently in these areas, Staples must have
processes within the company to enter customer orders, pick the correct items from the warehouse shelves, package and ship the items correctly, bill the customer correctly, and collect the payment as quickly as possible. If these processes are inefficient or poorly managed, the result may be unhappy customers and reduced sales. This chapter describes these types of revenue processes and the internal controls within those processes.
Real WorldReal WorldReal WorldReal World
Chapter 8-5
Companies sell products and/or services.
Examples:
SO 1 An introduction to revenue processes
Introduction to Revenue ProcessesIntroduction to Revenue ProcessesIntroduction to Revenue ProcessesIntroduction to Revenue Processes
Retailers:
Record the sale,
collect cash,
update inventory status
all at the time of the sale.
Manufacturers:
Sell product to other
companies.
Deliver goods and bill
customer at a later date.
Collect payment.
Chapter 8-6
Systems and processes must be in place to capture, record,
summarize, and report sales transactions.
Processes include:
Polices and procedures employees follow in completing the
sale.
Capturing customer data and sales quantities.
Routing sales documents to the right departments.
Introduction to Revenue ProcessesIntroduction to Revenue ProcessesIntroduction to Revenue ProcessesIntroduction to Revenue Processes
The Accounting System uses this flow of sales documents to various departments to record, summarize, and report the results of the sales transactions.
SO 1 An introduction to revenue processes
Chapter 8-7
Introduction Introduction to Revenue to Revenue ProcessesProcesses
Introduction Introduction to Revenue to Revenue ProcessesProcesses
Exhibit 8-1 Revenue Processes withinthe Overall System
SO 1 An introduction to revenue processes
Chapter 8-8
Business processes common in company-to-company sales transactions are:
Introduction to Revenue ProcessesIntroduction to Revenue ProcessesIntroduction to Revenue ProcessesIntroduction to Revenue Processes
1. Collect order data from customer
2. Deliver goods
3. Record receivable and bill customer
4. Handle product returns
5. Collect the cash
6. Update records, such as
accounts receivable, cash, inventory,
revenue, and cost of goods sold.
SO 1 An introduction to revenue processes
Chapter 8-9
Terminology
SO 2 Sales processes and the related risks and controls
Sales ProcessesSales ProcessesSales ProcessesSales Processes
Purchase Order
Sales Order
Price List
Credit Limit
Pick List
Packing Slip
Bill of Lading.
Shipping Log
Sales Invoice (Bill)
Sales Journal
Chapter 8-10
Sales ProcessesSales ProcessesSales ProcessesSales Processes
Exhibit 8-2Sales Process Map
See next slide for larger image.
SO 2 Sales processes and the related risks and controls
Chapter 8-11
Sales ProcessesSales ProcessesSales ProcessesSales Processes
SO 2 Sales processes and the related risks and controls
Exhibit 8-2Sales Process Map
Chapter 8-12
Sales ProcessesSales ProcessesSales ProcessesSales Processes
SO 2 Sales processes and the related risks and controls
Exhibit 8-2Sales Process Map
Chapter 8-13
Common procedures associated with the sales
process:
Authorization of transactions
Segregation of duties
Adequate records and documents
Security of assets and documents
Independent checks and reconciliation
Cost-benefit considerations
Controls and Risks in Sales ProcessesControls and Risks in Sales ProcessesControls and Risks in Sales ProcessesControls and Risks in Sales Processes
SO 2 Sales processes and the related risks and controls
Chapter 8-14
Characteristics indicating risk with respect to sales
processes:
Frequent changes made to sales prices or customers
Pricing structure is complex or based on estimates
Large volume of transactions
One or few key customers
Shipments not controlled directly by the company
Product mix is difficult to differentiate
Shipping and/or recordkeeping at multiple locations
Controls and Risks in Sales ProcessesControls and Risks in Sales ProcessesControls and Risks in Sales ProcessesControls and Risks in Sales Processes
SO 2 Sales processes and the related risks and controls
Chapter 8-15
The purpose of tracing shipping documents to
prenumbered sales invoices would be to provide
evidence that
a. shipments to customers were properly invoiced.
b. no duplicate shipments or billings occurred.
c. goods billed to customers were shipped.
d. all prenumbered sales invoices were accounted
for.
Controls and Risks in Sales ProcessesControls and Risks in Sales ProcessesControls and Risks in Sales ProcessesControls and Risks in Sales Processes
SO 2 Sales processes and the related risks and controls
Concept Check
Chapter 8-16
Controls and Risks in Sales ProcessesControls and Risks in Sales ProcessesControls and Risks in Sales ProcessesControls and Risks in Sales Processes
SO 2 Sales processes and the related risks and controls
Concept Check
The purpose of tracing sales invoices to shipping
documents would be to provide evidence that
a. shipments to customers were properly invoiced.
b. no duplicate shipments or billings occurred.
c. goods billed to customers were shipped.
d. all prenumbered sales invoices were accounted
for.
Chapter 8-17 SO 3 Sales return processes and the related risks and controls
Company must have procedures for receiving returned goods,
crediting customer’s account, and placing items back in
inventory.
Terminology:
Sales Return ProcessesSales Return ProcessesSales Return ProcessesSales Return Processes
Receiving log
Receiving report
Credit memorandum
Chapter 8-18
Exhibit 8-8Sales Returns Process Map
See next slide for larger image.
Sales Return ProcessesSales Return ProcessesSales Return ProcessesSales Return Processes
SO 3 Sales return processes and the related risks and controls
Chapter 8-19
Sales Return ProcessesSales Return ProcessesSales Return ProcessesSales Return Processes Exhibit 8-8Sales Returns Process Map
SO 3 Sales return processes and the related risks and controls
Chapter 8-20
Sales Return ProcessesSales Return ProcessesSales Return ProcessesSales Return Processes
SO 3 Sales return processes and the related risks and controls
Exhibit 8-8Sales Returns Process Map
Chapter 8-21
Specific controls over the sales returns process:
Authorization of transactions
Segregation of duties
Adequate records and documents
Security of assets and documents
Independent checks and reconciliation
Cost-benefit considerations
Risks and Controls in the Sales Return Risks and Controls in the Sales Return ProcessesProcessesRisks and Controls in the Sales Return Risks and Controls in the Sales Return ProcessesProcesses
SO 3 Sales return processes and the related risks and controls
Chapter 8-22
Circumstances which may indicate high level of risk.
Quantities of returns are difficult to determine
High volume of credit memo activity
Product prices change frequently, or pricing structure is otherwise
complex
Returns are received at various locations, or issuance of credit
memos may occur at different locations
One or few key customers
Returns not controlled directly by the company
SO 3
Risks and Controls in the Sales Return Risks and Controls in the Sales Return ProcessesProcessesRisks and Controls in the Sales Return Risks and Controls in the Sales Return ProcessesProcesses
Chapter 8-23
Concept Check
SO 3 Sales return processes and the related risks and controls
Risks and Controls in the Sales Return Risks and Controls in the Sales Return ProcessesProcessesRisks and Controls in the Sales Return Risks and Controls in the Sales Return ProcessesProcesses
Under a system of sound internal controls, if a company
sold defective goods, the return of those goods from the
customer should be accepted by the
a. receiving clerk.
b. sales clerk.
c. purchasing clerk.
d. inventory control clerk.
Chapter 8-24
Company-to-company sales are typically made on account,
and a time span is given for the customer to pay.
Terminology:
SO 4 Cash collection processes and the related risks and controls
Cash Collection ProcessesCash Collection ProcessesCash Collection ProcessesCash Collection Processes
Remittance advice
Cash receipts journal
Chapter 8-25
Exhibit 8-12Cash Receipts Process Map
See next slide for larger image.
Cash Collection ProcessesCash Collection ProcessesCash Collection ProcessesCash Collection Processes
SO 4 Cash collection processes and the related risks and controls
Chapter 8-26
Cash Collection ProcessesCash Collection ProcessesCash Collection ProcessesCash Collection Processes
SO 4 Cash collection processes and the related risks and controls
Exhibit 8-12Cash Receipts Process Map
Chapter 8-27
Cash Collection ProcessesCash Collection ProcessesCash Collection ProcessesCash Collection Processes
SO 4 Cash collection processes and the related risks and controls
Exhibit 8-12Cash Receipts Process Map
Chapter 8-28
Cash Collection ProcessesCash Collection ProcessesCash Collection ProcessesCash Collection Processes
Concept Check
SO 4 Cash collection processes and the related risks and controls
Which of the following is not a document that is part of the
cash collection process?
a. Remittance advice
b. Cash receipts journal
c. Bank deposit slip
d. Packing slip
Chapter 8-29 SO 4 Cash collection processes and the related risks and controls
Risks and Controls in the Cash Collection Risks and Controls in the Cash Collection ProcessesProcessesRisks and Controls in the Cash Collection Risks and Controls in the Cash Collection ProcessesProcesses
Specific controls over the cash receipts process:
Authorization of transactions
Segregation of duties
Adequate records and documents
Security of assets and documents
Independent checks and reconciliation
Cost-benefit considerations
Chapter 8-30
Circumstances that may indicate risks to cash collections.
High volume of cash collections
Decentralized cash collections
Lack of consistency in the volume or source of collections
Presence of cash collections denominated in foreign currencies
SO 4 Cash collection processes and the related risks and controls
Risks and Controls in the Cash Collection Risks and Controls in the Cash Collection ProcessesProcessesRisks and Controls in the Cash Collection Risks and Controls in the Cash Collection ProcessesProcesses
Chapter 8-31
Cash Collection ProcessesCash Collection ProcessesCash Collection ProcessesCash Collection Processes
Concept Check
SO 4
Which of the following would represent proper segregation of
duties?
a.The employee who has custody of cash also does accounts
receivable record keeping.
b.The employee who has custody of cash completes the bank
reconciliation.
c.The employee who opens mail containing checks prepares a list of
checks received.
d. The employee who opens mail containing checks records
transactions in the general ledger.
Chapter 8-32
Larger IT systems generally have:
Fewer manual processes
More computerized processes
SO 5 An overview of IT systems of revenue and cash collection that enhance the efficiency of revenue processes
IT Enabled Systems of Revenue and Cash IT Enabled Systems of Revenue and Cash Collection ProcessesCollection ProcessesIT Enabled Systems of Revenue and Cash IT Enabled Systems of Revenue and Cash Collection ProcessesCollection Processes
Chapter 8-33
IT Enabled IT Enabled Systems of Systems of Revenue and Revenue and Cash Cash Collection Collection ProcessesProcesses
IT Enabled IT Enabled Systems of Systems of Revenue and Revenue and Cash Cash Collection Collection ProcessesProcesses
Exhibit 8-17Revenue Processes System Flowchart
Exhibit 8-17 is a system flowchart of a generic version of revenue system withsome paper documents.
SO 5
Chapter 8-34
Sophisticated, highly integrated IT systems capture, record,
and process revenue and cash collection events.
Such systems include:
E-commerce systems.
Electronic Data Interchange (EDI) systems.
Point of Sale (POS) systems.
SO 5 An overview of IT systems of revenue and cash collection that enhance the efficiency of revenue processes
IT Enabled Systems of Revenue and Cash IT Enabled Systems of Revenue and Cash Collection ProcessesCollection ProcessesIT Enabled Systems of Revenue and Cash IT Enabled Systems of Revenue and Cash Collection ProcessesCollection Processes
Chapter 8-35
Sophisticated IT systems usually lead to:
First, underlying processes are reengineered (BPR) so as to
be conducted more efficiently.
Second, IT systems improve the efficiency of the related
information.
SO 5 An overview of IT systems of revenue and cash collection that enhance the efficiency of revenue processes
IT Enabled Systems of Revenue and Cash IT Enabled Systems of Revenue and Cash Collection ProcessesCollection ProcessesIT Enabled Systems of Revenue and Cash IT Enabled Systems of Revenue and Cash Collection ProcessesCollection Processes
Chapter 8-36
Two popular types of Internet sales:
Business to Business (B2B)
Business to Consumer (B2C)
SO 6 E-business systems and the related risks and controls
E-Business Systems and the Related Risks E-Business Systems and the Related Risks and Controlsand ControlsE-Business Systems and the Related Risks E-Business Systems and the Related Risks and Controlsand Controls
Chapter 8-37
Advantages of e-commerce include:
1. Reduced cost
2. Shorter sales cycles
3. Increased accuracy and reliability of sales data
4. Increased potential market for products and services
SO 6 E-business systems and the related risks and controls
E-Business Systems and the Related Risks E-Business Systems and the Related Risks and Controlsand ControlsE-Business Systems and the Related Risks E-Business Systems and the Related Risks and Controlsand Controls
Chapter 8-38
Many large corporations sell to other companies. Staples® is
an example of a company selling to other companies via
websites. Regarding sales of office supplies to other large
corporations, management at Staples realizes that it must
support orders in the manner the customer prefers. Jay Baitler,
the senior vice president of the Staples Contract Division, said,
“Offering Internet-based transactions is now critical.”2 Internet-
based sales accounted for 70 percent of the revenue in the
contract division.
SO 6 E-business systems and the related risks and controls
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Chapter 8-39
Risks related to Internet Sales include:
SO 6 E-business systems and the related risks and controls
Security and Confidentiality
1. Unauthorized access
2. Hackers or other network break-ins
3. Repudiation of sales transactions
Processing Integrity
4. Invalid data entered by customers
5. Incomplete audit trail
6. Errors when integrating data into back end systems
E-Business Systems and the Related Risks E-Business Systems and the Related Risks and Controlsand ControlsE-Business Systems and the Related Risks E-Business Systems and the Related Risks and Controlsand Controls
Chapter 8-40 SO 6 E-business systems and the related risks and controls
Controls should be in place to reduce the security,
availability, processing integrity, and confidentiality risks.
E-Business Systems and the Related Risks E-Business Systems and the Related Risks and Controlsand ControlsE-Business Systems and the Related Risks E-Business Systems and the Related Risks and Controlsand Controls
Risks related to Internet Sales include:
Availability
7. Hardware and software system failures that block customers from access to the website
8. Virus and worm attacks
9. Denial-of-service attacks by hackers
Chapter 8-41 SO 6 E-business systems and the related risks and controls
Concept Check
E-Business Systems and the Related Risks E-Business Systems and the Related Risks and Controlsand ControlsE-Business Systems and the Related Risks E-Business Systems and the Related Risks and Controlsand Controls
When a company sells items over the Internet, it is usually
called e-commerce. There are many IT risks related to Internet
sales. The risk of invalid data entered by a customer would be
a(n)
a.availability risk.
b.processing integrity risk.
c.security risk.
d.confidentiality risk.
Chapter 8-42 SO 6 E-business systems and the related risks and controls
E-Business Systems and the Related Risks E-Business Systems and the Related Risks and Controlsand ControlsE-Business Systems and the Related Risks E-Business Systems and the Related Risks and Controlsand Controls
Concept Check
When a company sells items over the Internet, there are many
IT risks. The risk of hardware and software failures that
prevent Website sales would be a(n)
a.availability risk.
b.processing integrity risk.
c.security risk.
d.confidentiality risk.
Chapter 8-43
Electronic data interchange is the inter-company, computer-
to-computer transfer of business documents in a standard
business format.
SO 7 Electronic data interchange (EDI) systems and the related risks and controls
ANSI X.12 standards divide EDI data transmissions into
three parts:
Header and trailer data
Labeling interchanges
Data segments
Electronic Data Interchange (EDI) Systems Electronic Data Interchange (EDI) Systems and The Risks and Controlsand The Risks and ControlsElectronic Data Interchange (EDI) Systems Electronic Data Interchange (EDI) Systems and The Risks and Controlsand The Risks and Controls
Chapter 8-44
Exhibit 8-18EDI Using a Third-Party Network
Value Added
Networks (VANs)
Electronic Data Interchange (EDI) SystemsElectronic Data Interchange (EDI) SystemsElectronic Data Interchange (EDI) SystemsElectronic Data Interchange (EDI) Systems
SO 7
Chapter 8-45
SO 7 Electronic data interchange (EDI) systems and the related risks and controls
Advantages to an EDI system within the revenue and cash
collection processes:
1. Reduction or elimination of data keying
2. Elimination of keying errors
3. Elimination of costs related to keying errors
4. Elimination of time needed to key in orders
5. Elimination of mail delays
Electronic Data Interchange (EDI) Systems Electronic Data Interchange (EDI) Systems and The Risks and Controlsand The Risks and ControlsElectronic Data Interchange (EDI) Systems Electronic Data Interchange (EDI) Systems and The Risks and Controlsand The Risks and Controls
Chapter 8-46
SO 7 Electronic data interchange (EDI) systems and the related risks and controls
Advantages to an EDI system within the revenue and cash
collection processes:
6. Elimination of postage costs
7. Reduction in inventory levels
8. Competitive advantage through better customer service
9. Preservation of business with existing customers who have
adopted EDI
Electronic Data Interchange (EDI) Systems Electronic Data Interchange (EDI) Systems and The Risks and Controlsand The Risks and ControlsElectronic Data Interchange (EDI) Systems Electronic Data Interchange (EDI) Systems and The Risks and Controlsand The Risks and Controls
Chapter 8-47
Northern Telecom (Nortel) switched to an Internet EDI system in the late
1990s. Nortel has customers all over the globe, and the use of the
Internet by Nortel customers to transmit purchase orders is a low-cost
transmission option for those customers. This was especially beneficial
to Nortel in expanding its customer base in Europe and Asia. As Nortel
works to gain new customers, a low-cost way to order is an enticement to
those customers. There are also other benefits to Nortel. The use of
Internet EDI eliminated the need for customers to fax purchase orders or
supplier information to Nortel. Michael Keef, the senior manager of
electronic business solutions at Nortel, said, “Errors occur when people
fax things. We won’t have to rekey shipment notices.”3 Details of Internet
EDI are described in a later chapter on e-commerce.
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SO 7 Electronic data interchange (EDI) systems and the related risks and controls
Chapter 8-48
Security and Confidentiality
1. Unauthorized access
2. Trading partners gaining access to unauthorized data
3. Hackers or other network break-ins
4. Repudiation of sales transactions
SO 7 Electronic data interchange (EDI) systems and the related risks and controls
Electronic Data Interchange (EDI) Systems Electronic Data Interchange (EDI) Systems and The Risks and Controlsand The Risks and ControlsElectronic Data Interchange (EDI) Systems Electronic Data Interchange (EDI) Systems and The Risks and Controlsand The Risks and Controls
Risks in an EDI system include:
Chapter 8-49
Processing Integrity
5. Invalid data entered by trading partners
6. Incomplete audit trail
7. Errors when integrating data into back end systems
SO 7 Electronic data interchange (EDI) systems and the related risks and controls
Electronic Data Interchange (EDI) Systems Electronic Data Interchange (EDI) Systems and The Risks and Controlsand The Risks and ControlsElectronic Data Interchange (EDI) Systems Electronic Data Interchange (EDI) Systems and The Risks and Controlsand The Risks and Controls
Risks in an EDI system include:
Availability
8. Hardware and software system failures that block customers from access to the EDI system.
Chapter 8-50
SO 7 Electronic data interchange (EDI) systems and the related risks and controls
IT controls can lessen these risks. Controls are:
Authentication
Encryption
Transaction logging
Control totals
Acknowledgment
Electronic Data Interchange (EDI) Systems Electronic Data Interchange (EDI) Systems and The Risks and Controlsand The Risks and ControlsElectronic Data Interchange (EDI) Systems Electronic Data Interchange (EDI) Systems and The Risks and Controlsand The Risks and Controls
Chapter 8-51
SO 7 Electronic data interchange (EDI) systems and the related risks and controls
Concept Check
Electronic Data Interchange (EDI) Systems Electronic Data Interchange (EDI) Systems and The Risks and Controlsand The Risks and ControlsElectronic Data Interchange (EDI) Systems Electronic Data Interchange (EDI) Systems and The Risks and Controlsand The Risks and Controls
The use of electronic data interchange (EDI) to conduct sales
electronically has both risks and benefits. Which of the
following is a benefit of EDI, rather than a risk?
a.Incomplete audit trail
b.Repudiation of sales transactions
c.Unauthorized access
d.Shorter inventory cycle time
Chapter 8-52 SO 8 Point of sale (POS) systems and the related risks and controls
Point of Sale systems, features that assist accountants and managers:
1. Touch screen menus
2. Bar code scanning
3. Real-time access to inventory and price data
4. Credit card authorizations during the sale
5. Real-time update of cash, sales, and inventory records
6. Immediate summaries and analyses
7. Integration with the company’s general ledger system
Point of Sale (POS) Systems and the Point of Sale (POS) Systems and the Related Risks and ControlsRelated Risks and ControlsPoint of Sale (POS) Systems and the Point of Sale (POS) Systems and the Related Risks and ControlsRelated Risks and Controls
Chapter 8-53
Point of Sale systems can reduce some processing integrity risks within revenue and cash collection:
1. Pricing errors for products sold
2. Cash overage shortage errors
3. Errors in inventory changes—less chance of an incorrect
product number
4. Erroneous or invalid sales voids or deletions
SO 8 Point of sale (POS) systems and the related risks and controls
Point of Sale (POS) Systems and the Point of Sale (POS) Systems and the Related Risks and ControlsRelated Risks and ControlsPoint of Sale (POS) Systems and the Point of Sale (POS) Systems and the Related Risks and ControlsRelated Risks and Controls
Chapter 8-54 SO 8 Point of sale (POS) systems and the related risks and controls
Concept Check
Point of Sale (POS) Systems and the Point of Sale (POS) Systems and the Related Risks and ControlsRelated Risks and ControlsPoint of Sale (POS) Systems and the Point of Sale (POS) Systems and the Related Risks and ControlsRelated Risks and Controls
An IT system that uses touch screens, bar coded products,
and credit card authorization during the sale is called a(n)
a. electronic data interchange system.
b. e-commerce system.
c. point of sale system.
d. e-payables system.
Chapter 8-55 SO 9 Ethical issues related to revenue processes
Intentional revenue inflation is unethical, and many
types of revenue inflation are illegal.
Two ways to inflate revenue:
Channel stuffing
Leaving sales open
http://www.sec.gov/litigation/litreleases/lr17001.htm
Ethical Issues Related to Revenue Ethical Issues Related to Revenue ProcessesProcessesEthical Issues Related to Revenue Ethical Issues Related to Revenue ProcessesProcesses
Chapter 8-56
In the early days of personal computers, one of the manufacturers of
hard drives was MiniScribe Corporation. The chief executive officer of
MiniScribe, Q.T. Wiles, was convicted of fraud in 1994 and subsequently
served 30 months in prison for falsifying revenue. To inflate revenues,
Q.T. Wiles came up with a novel idea. He made the employees ship
bricks, rather than hard drives, in boxes that were sent to distributors.
The company also shipped scrapped parts in boxes that were labeled as
hard drives. The company inflated revenue by recording completely
fictitious, fraudulent sales of these bricks and scrap materials. In
addition to the CEO being sentenced to jail time, the chief financial
officer, a CPA, was disciplined by the SEC. The company ultimately
failed.
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SO 9 Ethical issues related to revenue processes
Chapter 8-57
In 2008, the Coca-Cola Company agreed to pay a $137.5 million
settlement related to accusations of channel stuffing. After an eight-year
SEC investigation, Coke agreed to the settlement but admitted no
wrongdoing. The company had been accused of pressuring bottlers to
buy more soft drink concentrate than necessary. This overselling
technique added sales, and therefore higher profits, to Coke’s financial
reports, and it kept the stock price artificially inflated. Those who
purchased Coke stock in a short period in late 1999 to early 2000 were
entitled to a portion of the settlement. In a similar case, the SEC
investigated McAfee, Inc. in 2006. McAfee, a software seller, was
accused of selling its software products to its distributors in quantities
greater than end-consumer demand. The company admitted no
wrongdoing but ultimately agreed to a $50 million settlement.
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SO 9 Ethical issues related to revenue processes
Chapter 8-58
A recent example of accountants being involved in revenue misstatement
in an accounting fraud scheme occurred at HealthSouth Corp. Richard
Scrushy, the CEO, and five different financial officers were accused of
inflating profits by $1.4 billion. The accountants involved claimed that
Scrushy held so-called “family meetings” to help devise and cover up
earnings falsifications. In June of 2005, to the surprise of federal
prosecutors, Scrushy was found not guilty of all counts against him even
though the five other HealthSouth officials had plead guilty
and testified that Scrushy ordered the actions. Although a jury found him
not guilty, Scrushy’s job prospects as a CEO are severely damaged. At a
minimum, he tolerated and failed to prevent unethical behavior, even
though it was not proven beyond a reasonable doubt that he participated
in the events.
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SO 9 Ethical issues related to revenue processes
http://www.usdoj.gov/opa/pr/2003/July/03_crm_436.htm
Chapter 8-59 SO 10 Corporate governance of revenue processes
Four primary functions of the corporate governance process:
Management oversight.
Internal controls and compliance.
Financial stewardship.
Ethical conduct.
Establishing proper processes, internal controls, and ethical guidelines leads to better corporate governance and, therefore, good financial stewardship.
Corporate Governance of Revenue Corporate Governance of Revenue ProcessesProcessesCorporate Governance of Revenue Corporate Governance of Revenue ProcessesProcesses
Chapter 8-60 SO 10 Corporate governance of revenue processes
Corporate Governance of Revenue Corporate Governance of Revenue ProcessesProcessesCorporate Governance of Revenue Corporate Governance of Revenue ProcessesProcesses
Concept Check
Which of the following is not a method of unethically inflating
sales revenue?
a.Channel stuffing
b.Holding sales open
c.Premature recognition of contingent sales
d.Promotional price discounts
Chapter 8-61
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