Fraud Risk at Acme Industries

The possibility of ineffective monitoring of management as a result of an ineffective board of directors or audit committee oversight over the financial reporting process and internal controls.

A complex or unstable organization structure as evidenced by high turnover if senior management, legal counsel or board members

Aggressive accounting policy choices and questionable financial reporting practices adopted by management

Excessive pressure on management or operating personnel to meet financial targets established by the board of directors or senior management, including sales or profitability incenthve goals

Indications of inadequate segregation of duties or a lack of independent checks and balances

Inadequate physical safeguards over cash investments, inventory or fixed assets

Disregard for internal controls over misappropriation of assets by overriding existing controls or by failing to correct known control deficiencies

Disregard of the need for monitoring and reducing risks relating to misappropriation of assets

One of the strengths of Acme is an effective board of directors. For example, the board seems to play an appropriate role in monitoring Acme's business operations. With respect to item #1 listed above, the board meets five to six times a year,

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ol environment is inadequate. Specific to the question of high turnover, Acme has had higher than expected turnover recently, but one must consider this fact both in the current context and in light of its historically lower levels of turnover in key positions. Rather than adopting aggressive accounting policy choices, it appears that management is risk averse, and that it takes adequate time to assess potential risks before acting. It also appears that Acme is conservative in revenue recognition in conformity with GAAP requirements, and that while the accounting function is decentralized there is adequate oversight by senior management including the CFO and the CEO. It is also noted that accounting personnel have a responsibility to report issues or concerns to the centralized financial officers of the company. With respect to item #4, rather than place pressure on management and operating personnel, the tone at the top is one of fairness and integrity. The way management has dealt with potential defective products and environmental hazards is an example of management's commitment to integrity over short-term profit or gain. Another positive sign involves the fact that the compensation plan is structured in such a way that
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