Place extra attention on the what, why and when. The main issue in this case is the manipulation of account by ALGA Pharmaceuticals Corporation through the arrangement of DC and Crescendo. In this case, DC and Crescendo would have been classified as Variable Interest Entities of ALGA Pharmaceuticals Corporation under certain condition. Alga Pharmaceutical Corporation use the off-balance sheet financing techniques to funds its R&D activities. However, ALGA Pharmaceuticals Corporation’s financial statement failed to fleet economic reality through overstating revenues and net income.
First, ALGA did not include the assets, liabilities, equity, revenue or expense account of DC and Crescendo to consolidated financial statement. Second, there were some timing issues regarding Alga’s recording of product development revenue and Crescendo’s recording of R expense. Key players Based on the issues identified above, determine the key players involved, their position/roles and the main decision that they have to make. Mum. Who? Position/roles Main decision ALGA Pharmaceuticals Corporation ) To include or exclude the assets, liabilities, equity, revenue or expense account of DC and Crescendo to consolidated financial statement. ) Charge $247 million against earning in one–time or numbers of time in different period. STAGE 2 PART l: Detections For each decision that need to be made by each key player, identify the criteria that should be considered and the decision alternatives that are available Key player No. Decision criteria Alternatives To include or exclude the assets, liabilities, equity, revenue or expense account of DC and Crescendo to consolidated financial statement. 1. Performance of company to public 2. Tax rate or charges 3. Attractiveness of company to investors 1 .
Include the assets, liabilities, equity, revenue or expense account of DC and Crescendo to consolidated financial statement. 2. Exclude the assets, liabilities, equity, revenue or expense account of DC and 2 Charge $247 million against earning in one-time or numbers of time in different period. 1. Income smoothing 2. Decrease the level of shocking news to shareholders 3. Fear of being question by shareholders 2. Charge $247 million against earning in numbers of time in different period. PART II: Evaluations Evaluate each available alternative based on the decision criteria.
Key player DC and Crescendo to consolidated financial statement. No. Alternative Performance of company to public Tax rate or charges Attractiveness of company to investors Include the assets, liabilities, equity, revenue or expense account of DC and Crescendo to consolidated financial statement. Performance shown is poor if compare to the actual Lowe r Unattractive Exclude the assets, liabilities, equity, revenue or expense account of DC and Crescendo to consolidated financial statement. Performance shown is better than the actual Higher Attractive period. No.
Income smoothing level of shocking news Fear of being question by shareholders Charge $247 million against earning in one-time Remove peak and valley season Low Reduced Charge $247 million against earning in numbers of time in different period Income shown is inconsistent and instability of company position High Increased Preferred alternative & predicted outcomes: ALGA Pharmaceuticals Corporation should exclude the assets, liabilities, equity, venue or expense account of DC and Crescendo from its consolidated financial statement; and charge the $247 million against earning in one-time.
Through the fake and good result, they can attract more investor to invest in their company. They have to do this in their current situation especially when large sum of money is needed to do research. If the group shown good result with high profit, the tax rate or charges definitely will be increase. However, they still can use the shareholders’ fund to cover it. Alternatively, company can borrow money from financial institution to gain fund. Although such action is illegal, company can take risk and such risk may transfer to auditors if they unable to detect the fraud.
PART lb. Action & Implementation Plan Specify the action plan related to the decision made. Who Crescendo to consolidated financial statement. Charge $247 million against earning in one-time How The fictitious figures able to attract more investor to invest into their company and allow them to sustain longer. Missing information: – Assumptions: Assume auditor unable to detect the fraud by ALGA Pharmaceuticals Corporation. Time taken to complete this chart: 6 hours
