08 Apr UTStarcom is a global leader in the manufacture, integration, and support of networking and telecommunications systems.

FRAUD

INTERNATIONAL

PROFESSIONAL SKEPTICISM

UTStarcom, Inc. (LO 2, 3, 4, 5, 6, 8)

UTStarcom is a global leader in the manufacture, integration, and support of networking and telecommunications systems. The company sells broadband wireless products and a line of handset equipment to operators in emerging and established telecommunications markets worldwide. The following excerpt was obtained from the 2004 10-K of UTStarcom, Inc., which reported material weaknesses in the company’s internal controls. In describing the company’s remediation efforts, the company stated that “planned remediation measures are intended to address material weaknesses related to revenue and deferred revenue accounts and associated cost of sales.”

These material weaknesses were evidenced by the identification of six separate transactions aggregating approximately $5 million in which revenue was initially included in the company’s fourth-quarter 2004 financial statements before all criteria for revenue recognition were met. In addition, there were other transactions for which there was insufficient initial documentation for revenue recognition purposes but which did not result in any adjustments to the company’s fourth-quarter 2004 financial statements. If unremediated, these material weaknesses have the potential of misstating revenue in future financial periods. The company’s planned remediation measures include the following:

“The Company plans to design a contract review process in China requiring financial and legal staff to provide input during the contract negotiation process to ensure timely identification and accurate accounting treatment of nonstandard contracts.”

“In March 2005, the Company conducted a training seminar regarding revenue recognition, including identification of nonstandard contracts, in the United States and, in April 2005, the Company conducted a similar seminar in China. Starting in May 2005, the Company plans to conduct additional training seminars in various international locations regarding revenue recognition and the identification of nonstandard contracts.”

“At the end of 2004, the Company began requiring centralized retention of documentation evidencing proof of delivery and final acceptance for revenue recognition purposes.”

a.What features of this case should have indicated to the auditor a potentially heightened risk of fraudulent financial reporting?

b.Using the previous disclosures as a starting point, identify challenges regarding internal controls that a company may face in doing business internationally.

c.The company had disclosed its planned remediation efforts for 2004. How might the auditor have used that information in planning the 2005 audit?

d. Considering potential analytical procedures relevant to the revenue cycle, identify analytics that the auditor might use in 2005 to provide evidence that the problems detected in 2004 have been remedied.

e. Considering potential substantive tests of revenue, identify procedures that might be applied in 2005 to provide evidence that the problems detected in 2004 have been remedied.

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Written Assignment Case – Analysis Format

The purpose of the Case Study Analysis learning tool is to provide an opportunity for the student(s) to demonstrate the application of knowledge to a management/organizational scenario. Since most management problems are inherently multidimensional, the use of the Case Study Analysis tool is a ‘hands-on’ process that helps students experience organizational complexities within a thoughtful forum. Therefore, the quality of your responses is more important than the quantity.  Keep in mind the student-learning model: Absorb, Synthesize, Analyze, Apply, Conclude and Demonstrate.  Your report will be (1-2 pages in length, APA format).  

Defining the central problem (Introduction)      5 PTS                                   

Provide a summary statement to demonstrate an understanding of the problem being presented. Summary statements are, typically, 3 – 5 sentences.  This introduction supports your thesis or proposition statement.

Case Summary       5 PTS

The summary should be brief and highlight the key factors or events relevant to your analysis or position.

Identify the relevant factor(s) and explain why they are important to the case.    10 PTS

It is not unusual for a case to have several relevant factors that are crucial to identifying a course of action. However, it is critical to the analysis that the relevant factors number no more than 3 and that it represents the graduate student’s choice (not the instructor) and it is important to state ‘Why’ you think the factor(s) you have chosen are important.

Analysis                10     PTS                                                                                      

The analysis section must be organized in a logical fashion, be written in a manner that advances your thesis; be supported by supplemental research, and demonstrate the ability to apply key course concepts to the actual case.

Recommendations       5 PTS

The recommendations section must include your solutions to the problems you have identified in the analytical section.  It is important that your recommendations, if implemented, adequately address all of the problems that you indicate are in existence.  Additionally, each recommendation needs to meet the test of feasibility.  In other words, are these actions cost-effective, could they realistically be implemented, and are they in compliance with regulations?

Conclusions            5  PTS                                                                                   

Identify a course of action you would take to resolve the case problem and what do you think needs to happen once the action has been taken. Feel free to support your course of action through personal, vicarious and/or classroom experiences.

References            5   PTS                                                                          

All sources cited within your work are to be included in your references section in APA form.

APA Format, Grammar and Style 5 PTS

Paper must be written in the appropriate APA format and style 6th ed.

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