Bankrate was established in 1976 by Robert K. Heady as “Bank Rate Monitor,” a print publisher for the banking sector. Bankrate made its online debut in 1996 at Bankrate.com. The firm helps in maximizing money and the mastery of life’s financial journey. In the endeavor to make financial decisions at nearly every stage of life, they offer the expert advice and tools needed to make the choices with confidence. They help in finding and comparing rates on financial products like mortgages, car loans, credit cards, savings accounts, certificates of deposit, checking and ATM fees, banking fees, and home equity loans. They also publish original and objective content to help in making smarter financial decisions. Bankrate has over four decades’ practice in commercial publishing. Currently, it has increased site traffic to over fifteen million monthly unique visitors, expanded distribution outlets and added new content channels.
SEC (2015) complaint contained the following specific narration relating to the alleged financial fraud.
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• After discovering that Bankrate’s preliminary financial results for the second quarter of 2012 defaulted analyst estimates, the CFO arbitrarily decided to increase the firm’s revenues after the end of the quarter.
• The CFO, through the vice president and head of accounting, directed insurance and credit card divisions to book round dollar amounts of additional revenue without any basis.
• The insurance division booked the requested income immediately to a dormant customer account with no intention of explaining the revenue until the company’s auditor noted it.
• The credit cards division opposed the CFO’s directive but ultimately booked some improper income.
• Upon the refusal by the credit card division to heed the instruction, the CFO insisted the recording of the relative difference as revenue by a different business unit.
• Consequently, Bankrate recorded additional unconscionable revenue to two arbitrary mortgage business clients.
• In addition to booking inappropriate revenue, Bankrate, through the accounting executives, ineptly reduced certain expenses or failed to schedule them to meet analyst estimates.
• One of the firm’s expense accounts and related accrual account tampered by Bankrate had been used as a “cushion” account to tamper the firm’s financial results for at least a year.
• The three executives lied to the company’s auditor regarding the inappropriate accounting entries.
The former CFO pleaded guilty to conspiracy to make false statements to a public firm’s accountants, falsifying a public company’s books, accounts, and records, committing securities fraud and making materially false statements to the SEC. The primary objective of an ordinary audit of financial statements by an independent auditor is the expression of an opinion. The opinion indicates the fairness of the financial statements in all material respects, results of operations, financial position, and the cash flow in conformity with the generally accepted accounting principles and standards. The auditor states whether his audit has been made according to generally accepted auditing standards. These standards require a statement whether, in the auditor’s opinion, the financial statements presented match the generally accepted accounting principles. Further, to identify the circumstances in which such principles have not been consistently observed in the preparation of financial statements for the present period concerning those of the previous period.
The auditor bears the responsibility to plan and perform the audit to obtain agreeable assurance about whether the financial statements are free of material misstatement due to error or fraud. The auditor obtains fair, but not absolute certainty about detection of material misstatements. The independent auditor is required to exercise his judgment in establishing which auditing procedures are necessary to form a reasonable basis for the opinion. SAS No. 1, section 220 indicates that the general standard requires the auditor to maintain independence in mental attitude in all issues relating to the audit. It emphasizes that auditors must be devoid of bias concerning clients for their findings to be dependable (AICPA, 2018). The SAS also indicates that auditors must be intellectually independent by being free from any obligation to or interest in the client, its owners or management.
The auditors of Bankrate failed to exercise independence as provided in SAS No. 1. One of the listed improprieties by the executives of the company indicates that they lied to the auditors regarding the inappropriate accounting entries. The auditors relied on the information provided to them to form an opinion on the financial statements. According to the eventualities, it was evident that the entries constituted material misstatements whose impact was significantly erroneous and fraudulent. Whereas the management must use appropriate accounting standards and principles, the auditors must review the appropriateness of the rules and policies for which to form an opinion. For instance, it is incomprehensible that the auditors did not note the failure to book certain expenses relating to the period under audit.
The Public Company Accounting Oversight Board (PCAOB) professional standards indicate the importance of professional objectivity and skepticism in the audit process. It explains skepticism as an attitude that includes a curious mind and a critical assessment of the sufficiency and appropriateness of audit evidence. SAS No. 1, section 230 establishes the general standard that the auditor must exercise due professional care in audit performance and report preparation. It also emphasizes the need for applying professional skepticism when weighing the possibility of the presence of a material misstatement due to fraud (AICPA, 2018). Further, the standard requires that in gathering and evaluating evidence, the auditor should not be contented with less-than-persuasive evidence because of a belief that management is honest. Bankrate’s auditors failed to exercise professional due care and skepticism to the extent that they relied on the management’s explanations without evaluating the truth and fairness in them.
Bankrate’s auditors contravened the provision of SAS No. 1, section 410. The regulation requires that auditors adhere to GAAP. It states that the auditor’s report must include a statement whether the financial statements presented are following GAAPs. The departure from this provision by the management of Bankrate for ulterior motives and the failure of the auditors to indicate this departure in their reports creates the perception that the auditors are co-conspirators to the scheme of portraying the company as fulfilling analyst expectations.
SAS No. 32 describes the adequacy of disclosures in financial statements. It requires that when the auditor determines that informative disclosures are not reasonably sufficient, the auditor must state it in the auditor’s report (AICPA, 2018). The adequate disclosure refers to material matters relating to the form, arrangement, and content of the financial statements and their annexed notes including, for instance, terminologies used, amount of details provided, item classification and their bases of amounts set forth. The standard also requires that the auditor should express a qualified or adverse opinion if the management omits information that is needed by GAAPs in the financial statements. In the spirit of professional duty of care, skepticism, and independence, the auditors of Bankrate ought to have done a detailed evaluation of the information the management provided to them concerning omissions of some expenses and inclusion of some revenues. The eventual realization that the information provided was unreliable indicated that the administration did not annex adequate financial information as required by GAAP. The auditors also failed to evaluate the financial statements adequacy of disclosures, in which case they could have either expressed an adverse or qualified report.
Internal controls ensure the reliability and integrity of financial information that is accurate, timely and complete (Donelson, Ege, & McInns, 2016). The controls also help to ensure compliance with the prevailing federal, state and local laws and regulations affecting the operations of the particular business. They help to promote efficient and effective services through the provision of an environment in which managers and other staff maximize the efficiency and effectiveness of their operations. Further, internal controls provide a mechanism for management to monitor the achievement of operational objectives and goals. An internal control system consists of activities, policies, and procedures. Preventive control procedures frauds such as thorough documentation seek to prevent the incidence of errors or. Detective control activities such as reconciliation identify undesirable occurrences (Donelson et al. 2016).
There is a significant level of management override in Bankrate. This override is a situation where high-level personnel override prescribed policies and procedures for personal gain. The managers engage the lower level employees in a way that circumvents organizational and departmental policies to serve their interests resulting in a conflict of interest. The CFO of Bankrate, through the head of the accounting unit and vice president, engaged in fraudulent tactics to establish an illusion that the company was performing well (The United States Department of Justice, 2018). One of the accusations leveled as impropriety against the CFO included improper influence over insurance and credit card divisions to book round dollar amounts of additional revenue without basis.
The CFO also directed that a different business unit book improper revenue when the previously instructed divisions declined. Management override is also evident in the plot by the three executives to drive a personal agenda by directing lower level employees to act in contravention of accounting principles and standards. For instance, the CFO, through the head of accounting instructed the accounting department not to book certain expenses while including improper revenue. The plot by the three executives circumvented the segregation of duties. They abandoned their specific responsibilities within their particular managerial positions and influenced various departments to collaborate to commit fraud.
The three executives circumvented management supervision controls. They failed to adequately monitor the operation of the laid down procedures as they were designed to. It is unfathomable how a professional manager can advance the concept of inclusion of improper revenues or the omission of certain expenses. The management created fraudulent errors in the financial statements and overrode on the internal control personnel to continue with the recording of the errors (The United States Department of Justice, 2018). They failed in their responsibility of error and fraud detection and institution of remedial measures to prevent the occurrence of the same. The management was unable to consider changes and improvements where weaknesses were exposed until the law enforcement agencies intervened.
The management of Bankrate would have developed a system of checks and balances to ensure that no single person controls all parts of accounts receivable and accounts payable. This control will eliminate the tendency of future managers to exert much influence on the inclusion and exclusion of some revenues and expenses. This policy could have explicitly stated that top managers cannot override any accounting policy or standard. Further, that the senior managers cannot influence the decision making of low-level staff in the accounting department unless it is based on principle, policy or standard. To achieve this control, Bankrate needed the involvement of several persons before making the ultimate decision concerning receivables and payables.
The involvement of Bankrate executives in fraud indicated a weak link in the participation of the board of directors through oversight of the company’s operations and management. However, it is unclear whether the financial fraud was done in the full knowledge of the board. The board could have regularly monitored the firm’s financial activity relating to revenues and expenses and demand explanations for significant variations from budgets and accounting policies and standards. The board could have required that the independent auditors present, explain the financial statements, and serve them with management letters. The board also failed to evaluate the CFO’s performance against the job description regularly.
IAS 8 defines accounting policies as the specific principles, conventions, bases, rules, and practices applied by an entity in the preparation and presentation of financial statements. The materiality concept applies to rounded figures in the financial statements. According to this concept, a company can round figures of revenue if the rounding is insignificant to the financial statements to the effect they would not mislead the readers of the financial statements (Wells, 2017). Bankrate’s rounding of dollars was intended to inflate revenue which means that it was significant to the financial statements to constitute an impropriety. IAS 8 provides detailed explanations on the selection and use of accounting policies, consistency of accounting policies and changes in accounting policies. IAS 8.7 indicates that when a standard or an interpretation explicitly applies to a transaction, other event or condition, the accounting policy applied to that item must be determined by using the rule or interpretation and observing any relevant guidance issued by IASB for the standard or translation.
IAS 8.10 requires that in the absence of an interpretation or a standard explicitly applying to a transaction, event or condition, the management must exercise its judgment in developing and using an accounting policy that results in information that is pertinent and reliable. IAS 8.11 further clarifies that the decision must consider the applicability of the requirements and guidance in IASB standards dealing with related or similar issues. Also, review the definitions, recognition standard and measurement concepts for assets, liabilities, income, and expenses in the framework. IAS 8.12 allows management to consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to create accounting standards, other accounting literature and accepted practices to the extent that they do not disagree with the sources in paragraph 11.
Finally, IAS 8.13 provides that a firm shall choose and apply its accounting policies consistently for similar transactions, other conditions and events unless an interpretation or a standard requires explicitly or allows categorization of items for which different procedures may be suitable. It is evident from the policies that the executives of Bankrate departed from an already established policy framework guiding the handling of transactions, events or conditions. They failed to apply a consistent accounting policy in revenue recognition, expense recognition, and treatment of expense accounts and related accruals by utilizing ulterior motives to mask their underachievement.
References
AICPA. (2018). Statements on auditing standards . Retrieved September 27, 2018 from https://www.aicpa.org/research/standards/auditattest/sas.html
Donelson, D. C., Ege, M. S., & McInnis, J. M. (2016). Internal control weaknesses and financial reporting fraud. Auditing: A Journal of Practice & Theory , 36 (3), 45-69.
The United States Department of Justice. (2018). Former Chief Financial Officer of Bankrate Inc. pleads guilty to orchestrating complex $25 million accounting and securities fraud scheme . Retrieved September 27, 2018 from https://www.justice.gov/opa/pr/former- chief-financial-officer-bankrate-inc-pleads-guilty-orchestrating-complex-25-million
U.S Securities and Exchange Commission (SEC). (2015). SEC charges Bankrate and former executives with accounting fraud . Retrieved September 27, 2018 from https://www.sec.gov/news/pressrelease/2015-180.html
Wells, J. T. (2017). Corporate fraud handbook: Prevention and detection . John Wiley & Sons.
