the molex inc case study

8/15/2019 The Molex Inc Case Study

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The Molex Inc Case Study

Introduction

The Molex Corporation is an electronic connector manufacturing firm,which is based in Illinois. This company is facing a financial reportingproblem in which the financial statements were overstated. Joe King ,theC ! of the company, was appointed in July of "##$, and was responsiblefor managing and inventory control, among other very important duties.%iane &ulloc' was hired in "##(, to replace the previous C)!. &oth &ulloc'and King were being accused of what* by the external auditors, %eloitte +Touche, for not disclosing an million pre-tax inventory valuation error.

)inancial reporting roblem

The financial reporting problem at Molex was that, /the profit on inventorysales that the company made between its subsidiaries but which had notyet been sold to external customers had not been excluded from thecompany0s consolidated earnings and also in the company0s inventory1 alepu + 2ealy, "## 3.4 &asically, Molex reported additional inventory andearnings from the internal inventory sales. 5s a result, the company6searnings, net income, and inventory were overstated /by 7 Million beforetaxes and 78. million after taxes, with 7( million before taxes and 7"."million after-taxes was from year ended June (#, "##9.4 5s it was stated onpage $"-": of the &usiness 5nalysis and ;aluation applications, /The mainproblem came from the C ! and C)! decision to not disclose this error onthe financial statements that were released on July "$, "##9 1 alepu +2ealy, "## 3.4 The auditors were not thrilled about the poor 1of3 decision of King and &ulloc' to withholding this information from them. 5s a result, theauditors no longer have trust on the C ! and C)! and re


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period first etained arnings????????????????7 ,###,###

Inventory??????????????????????????.7 ,###,###

@hen an error of overstatement li'e this one happens, the financialstatements have to be restated in order1ed3 to bring net income to thecorrect amount. The Cost of goods sold should6ve been increased by 7million and the same

7 mill needed to be deducted from net income on the income statement.They should have followed 1)ollowing3 with disclosure notes to describewhy this error occurred and how it impacted the statement and accountsthat it touched. )or instance, the notes would describe the presence of thecorrection on the current period of beginning inventory, and retain %earnings.

>ole of Top Management, The 5udit committee and The xternal 5uditor in)inancial >eporting

The audit committee6s role in financial reporting is to ensure that accurateand transparent disclosure is being presented to the public, investors, andshareholders. The role of top management in financial reporting is to ma'esure that the financial statements and disclosures are in accordance toA55 , and that everything disclosed is truthful, while not hurting thebusiness. The role of an external auditor is to ensure that the financialstatements are presented fairly and without material misstatements inaccordance to A55 B basically, auditors guarantee the C that thecompany did in fact follow1ed3 the rules and is in compliance with A55 , or if the company is trying to, or has already, committed fraud. Aiven that theerror of Molex was believed to be immaterial, the C ! and C)! decidednot to ta'e the issue to the auditors, since the error wouldn6t have affectedthe financial performance of the company. Management assumed thatsince no1t3 harm was caused to financial performance or /earnings4 the


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auditor didn6t need to be informed. &ut the manager had not analyDed themagnitude of the error at the time of its occurrence. The issue was ta'en tothe auditors when managers saw a huge overstatement of 7 mills on netincome and inventory.

5uditors Concern about the roblem

The external auditors were very concerned about the error because theywere not informed until after the fourth


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for the previous year 1fourth

the molex inc case study

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