The "Security and Exchange Commission (SEC)" is a large and independent agency created to protect investors and national banking systems in the stock market. It is responsible for enforcing the federal security laws, regulation of security industries, and giving the proposal of the security rules. The security industry is the stock and options exchange in any given nation. SEC always has three main objectives; protection of investors, capital formation facilitation, and maintenance of fair, orderly, and efficient markets. However, many companies have been violating the "General Acceptable Audit Principles (GAAP)" by employing creative accounting practices to mislead the investors and creditors on the company's financial status. This paper focuses on the accounting scandal by Celadon Group Inc., a truckload freight company.
According to SEC (2020), SEC charged the Indianapolis-based group, Celadon Group Inc., with accounting fraud allowing the truckload freight company to evade substantial and misrepresenting its financial health. The SEC charged that in the middle of 2016 and April 2017, Celadon evaded disclosing a minimum of $20 million in impairment charges and losses, which was more than 60% of its 2016 income before taxation, selling, and buying used vehicles at a heightened price from the third party. Celadon stated more than the real value net income and earnings per share while announcing its annual report for the trading period that ended on June 30th, 2016, in addition to its first two 2017 financial quarters’ subsequent public filings. The fraud involved the sale of trucks to the corporate third-party track dealers to mask their overvaluation of the trucks at inflated prices. It sold more than a thousand trucks to third parties at very high prices.
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The SEC's complaint charged the company with fraud, violation of reporting books and record, and internal control violation. As a result, the company admitted to the scandal besides agreeing to a permanent injunction as well as remediate its material weaknesses in its internal control of its reports regarding finance. Additionally, the company also agreed to pay seven million dollars in disgorgement, subject to the court's approval.
The company violated the set GAAS standards of reporting. The standards state that the auditor's report must note whether the representation of financial statements are in accordance with the generally accepted principles. If the company's auditor determines that the financial statement's information is not adequate and reasonable, then the auditor must state in the report. Further, the general GAAS standards of reporting also needs the auditor's report to express a view on the financial statements as a whole. It states that the auditor cannot relay their opinion with a reason for failing to do so. However, the Celadon group might have violated these general GAAS standards of reporting. That could have been why the third party could not identify the fault in the report.
On the financial statement, the auditor is responsible for expressing their opinion to indicate a reasonable argument indicating that there has been a reasonable assurance obtained. Additionally, they are responsible for stating that the financial information is wholly error-free from material misstatement on fraud or error. The statement is fairly presented following the relevant general standards set by the GAAS. The auditor has the responsibility of expressing an independent and objective opinion on a company's financial statement (DeZoort & Harrison, 2016). The auditor gives the view by planning specific procedures and also provide the report on the audit results while considering the assertions, representations, and management responsibility for the financial statement. On the other hand, the management of the company is responsible for the company's integrity and the objectivity of the financial statement of any company. Comparing the two parties' responsibility, the Celadon group Inc. auditor has a more significant burden for the wrong financial information relayed to the public. That is because they have the responsibility of preparing the statement and knowing the existing GAAS, which are supposed to be taken into account while preparing the report.
Section 906 of SOX is addressing criminal penalties for any misleading or fraudulent financial report of a company or organization. In fact, according to Sarbanes-Oxley (2020), penalties may be above $5 million fines and imprisonment of 20 years. Besides, the Sarbanes-Oxley 2020 Act for section 906 indicates that each periodic financial report filed by any company must be accompanied by the chief executive officer's written statement financial report as well as the chief financial officers' statement in written form. The SOX also requires that the written report from both the company's principal executive officer together with chief financial officer statements must certify that the issued financial statement fully complies with security exchange act. The information within the report presents financial conditions and the results of the user's operation.
To hold the auditor firmly accountable for the accounting irregularities, the "Public Company Accounting Oversight Board (PCAOB)" should sue the company's chief auditor to the court in order to be fined of at most $1 or jailed for not more than ten years according to the SOX act.
All in all, an accounting scandal such as the one by Celadon Group Inc. can bring several adverse effects to both parties involved and the third parties within the company's operational circle. Moreover, the company's executive management can be responsible for violating the GAAS standards pertaining to its financial report release. However, fraudulent and misleading reports relayed to the public can be avoided if the responsible parties follow the standards set by the GAAS.
References
DeZoort, F., & Harrison, P. (2016). Understanding Auditors’ Sense of Responsibility for Detecting Fraud within Organizations. Journal of Business Ethics , 149 (4), 857-874. https://doi.org/10.1007/s10551-016-3064-3
Sarbanes-Oxley. (2020). SOX Section 906: Corporate Responsibility for Financial Reports . Sarbanes-oxley-101.com. Retrieved 2 November 2020, from https://www.sarbanes-oxley-101.com/SOX-906.htm.
SEC. (2020). SEC.gov | SEC Charges Truckload Freight Company with Accounting Fraud . Sec.gov. Retrieved 2 November 2020, from https://www.sec.gov/news/press-release/2019-60 .
