DISCUSSION: INTERNAL CONTROLS AND ETHICS ANALYSIS ASSIGNMENT INSTRUCTIONS OVERVIEW The student will complete one Discussion: Internal Controls and Ethics Analysis in this course. INSTRUCTIONS The c

DISCUSSION: INTERNAL CONTROLS AND ETHICS ANALYSIS ASSIGNMENT INSTRUCTIONS OVERVIEW The student will complete one Discussion: Internal Controls and Ethics Analysis in this course. INSTRUCTIONS The c
This study source was downloaded by 100000793288509 from CourseHero.com on 01-23-2022 01:14:04 GMT -06:00 https://www.coursehero.com/file/35392705/Case-38-The-Boeing-Companydocx/ Running head: CASE 3.8 THE BOEING COMPANY 1 Case 3.8: The Boeing Company Jennifer Hewitt Liberty University This study source was downloaded by 100000793288509 from CourseHero.com on 01-23-2022 01:14:04 GMT -06:00 https://www.coursehero.com/file/35392705/Case-38-The-Boeing-Companydocx/CASE 3.8 THE BOEING COMPANY 2 Summary Matthew Neumann and Nicholas Tides were former employees of the Boeing Company in 2007. They were part of a 10-member audit team responsible for monitoring Boeing’s IT controls within the financial reporting function in order to assist management in compliance efforts for internal controls mandated by SOX. In addition to the 10- member team, PricewaterhouseCoopers (PwC) was contracted to assist and provided about 70 auditors. Deloitte was the independent audit firm responsible for preparing an annual report on the effectiveness of Boeing’s internal controls in regards to financial reporters. In early 2007, Neumann and Tides discovered numerous major issues with the IT financial reporting controls and brought the concerns to their supervisors frequently. Among these issues, the two most significant allegations were that PwC auditors had managerial authority over Boeing’s employees and internal auditors; the control environment’s integrity was questionable because management allowed insiders to change audit results and conceal failed controls. However, these claims were essentially ignored while management issued effective ratings for their internal controls for fiscal years 2006 and 2007. Deloitte also issued unqualified opinions in which no material weaknesses were identified. In July of 2007, a reporter from the Seattle Pots-Intelligencer published an article on Boeing’s internal control issues and its “threatening company culture.” The article provided a copy of an email from the CFO to subordinates stating the performance of the internal controls was unacceptable. Additionally, the article stated that Deloitte was aware of the issues and identified a “significant deficiency” for the past three years in This study source was downloaded by 100000793288509 from CourseHero.com on 01-23-2022 01:14:04 GMT -06:00 https://www.coursehero.com/file/35392705/Case-38-The-Boeing-Companydocx/Running head: CASE 3.8: THE BOEING COMPANY 3 regards to security holes. However, Deloitte issued unqualified opinions each year because the concluded the issues did not rise to the level of a material weakness. Boeing’s management began an investigation to determine if employees had been communicating with the media. The investigation included interviews and computer and email communications monitoring of several employees including Neumann and Tides. At the conclusion of the investigation, it was discovered that both Neumann and Tides had communicated with the Seattle Pots-Intelligencer reporter despite the company’s policy prohibiting employees from communicating with the media without prior approval. As a result, Neumann and Tides were terminated on the basis of violating specific company policies and procedures. In December 2007, Neumann and Tides began what would be a long battle in court to challenge their dismissals based on SOX Section 806 which provides legal remedies for employees that are fired or punished after making whistleblower reports. Unfortunately, a federal district court dismissed their cases in 2010 and again by U.S. Court of Appeals in 2011 on the grounds that SOX Section 806 only protects whistleblowers if the communications are between a federal regulatory or law enforcement agency, the U.S. Congress, or a person with supervisory authority over the employee. Since the media did not fall into one of those categories, the courts ruled they were not entitled to the protections provided by SOX Section 806. Their last hope was to take the case to the U.S. Supreme Court, but in October 2011, the Supreme Court refused to review the lawsuits and prior rulings. Neumann and Tides were eventually able to secure employment elsewhere but took significant pay cuts. Neumann and Tides cases This study source was downloaded by 100000793288509 from CourseHero.com on 01-23-2022 01:14:04 GMT -06:00 https://www.coursehero.com/file/35392705/Case-38-The-Boeing-Companydocx/Running head: CASE 3.8: THE BOEING COMPANY 4 were not unique, as of 2012, about 1900 whistleblower cases had been filed and less than 350 were resolved in favor of the complainants (Knapp, 2018, p. 321-326). Questions 1. The COSO internal control framework identifies five internal control components. Which of those components is most relevant to the procedures that SOX mandates public companies establish to enable, if not encourage, whistleblowing by corporate employees? The COSO internal control framework consists of the following five internal control components, control environment, risk assessment, control activities, information and communication, and monitoring (McNally, 2013). The control environment component is the most relevant to whistleblowing because it is the foundation for the internal control system. This component identifies the company’s ethical values, establishes structure, authority and enforces accountability (McNally, 2013). The SOX requires public traded corporations to establish audit committee and procedures for filing internal whistleblower complaints in order to protect the complainant’s confidentiality (Kohn). In the case of Neumann and Tides, the control environment at Boeing not only lacked integrity but it appeared to lack in accountability and establishing appropriate authorities and structure. For instance, Neumann and Tide tried to address their concerns internally on numerous occasions only to be ignored. When they finally resorted to “whistleblowing” they’re confidentiality was not protected and they were ultimately fired. This study source was downloaded by 100000793288509 from CourseHero.com on 01-23-2022 01:14:04 GMT -06:00 https://www.coursehero.com/file/35392705/Case-38-The-Boeing-Companydocx/Running head: CASE 3.8: THE BOEING COMPANY 5 2. Explain the difference between a “significant deficiency” and “material weakness” in internal control. Provide an example of each. According to the PCAOB AS 2201, a significant deficiency occurs when the deficiency is less severe than a material weakness but still warrants the attention of those responsible for oversight of the company’s financial reporting. A material weakness occurs when there is a reasonable possibility that a material misstatement on annual or interim financial statements will not be prevented or detected on a timely basis. The main difference between a significant deficiency and material weakness is the magnitude of the possible misstatement (Louwers, Blay, Sinason, Strawser, & Thibodeau, 2018). For example, consider regular intercompany transactions. The transactions are not material but a policy requires a monthly reconciliation of these transactions. However, there is not a process to ensure the reconciliations are being performed, thus, reconciliations are not completed in a timely manner. This would result in a significant deficiency because the misstatement that would likely occur would be less than material. If the transactions were material, than this deficiency would be classified as a material weakness. 3. Assume that the PwC Contract auditors did, in fact, exert “managerial authority” over Boeing employees? What internal control problems or issues would that have posed for Boeing? PwC was contracted to assist the internal audit team. Under the COSO framework, the role of an internal auditor falls in the monitoring component. They are responsible for conducting ongoing and separate evaluations and reporting This study source was downloaded by 100000793288509 from CourseHero.com on 01-23-2022 01:14:04 GMT -06:00 https://www.coursehero.com/file/35392705/Case-38-The-Boeing-Companydocx/Running head: CASE 3.8: THE BOEING COMPANY 6 deficiencies (Louwers, et al., 2018). If PwC exerted “managerial authority” over Boeing employees, it would cross over to the control component of the framework causing confusion as to who the auditors should report to. If the internal auditors are not sure who they should report to, there is potential for internal control issues to fall through the cracks. Additionally, it could affect the independence of PwC because they may have a monetary incentive to manipulate the reports in order to maintain future contract work with Boeing. 4. Would it have been unethical or otherwise inappropriate for Neumann and Tides to have directly communicated their concerns regarding Boeing’s IT controls to the company’s Deloitte auditors? Explain. Assuming that Neumann and Tides had done just that, how should the Deloitte auditors have responded? I don’t believe it would be unethical for Neumann and Tides to directly communicate their concerns with Deloitte auditors because not only did they report their concerns to their superiors on numerous occasions but PCAOB AS 2605 requires independent auditors to obtain an understanding of the internal audit function. If Neumann and Tides had reported their concerns to Deloitte auditors, they would be required to perform an independent assessment of the claims in accordance with PCABO AS 2605. 5. Why do you believe that SOX does not provide legal remedies for corporate whistleblowers who are punished by their employers after communicating with members of the news media? Ashley Post wrote an article on this subject shortly after the final ruling in this case. She found that several people from various whistleblower teams stated that This study source was downloaded by 100000793288509 from CourseHero.com on 01-23-2022 01:14:04 GMT -06:00 https://www.coursehero.com/file/35392705/Case-38-The-Boeing-Companydocx/Running head: CASE 3.8: THE BOEING COMPANY 7 whistleblower reports should be made to organizations that have the authority to address the issues but the media has no such authority and can impede investigations (Post, 2011). I agree with these conclusions, the media has a tendency to embellish or misrepresent facts and they have no legal authority to initiate investigations. It would have been better for Neumann and Tides to follow the Boeing procedures for reporting their finding and if that did not work then to contact the next governing authority, not the media. 6. Was it ethical for Boeing to monitor the computers and email of Neumann and Tides during the investigation to determine whether one or more employees were communicating with members of the news media? Defend your answer. Yes, it was ethical for Boeing to monitor the computers and email of Neumann and Tides. Boeing had specific policies in place regarding communication with the media. Additionally, Boeing owns all proprietary information and equipment including the computers and email conversations. It is well within the company’s right to monitor the employee’s computer and email use. This study source was downloaded by 100000793288509 from CourseHero.com on 01-23-2022 01:14:04 GMT -06:00 https://www.coursehero.com/file/35392705/Case-38-The-Boeing-Companydocx/ Powered by TCPDF (www.tcpdf.org)CASE 3.8 THE BOEING COMPANY 8 References AS 2201: An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements Title Footnote // . (n.d.). Retrieved February 09, 2018, from https://pcaobus.org/Standards/Auditing/Pages/AS2201.aspx AS 2605: Consideration of the Internal Audit Function Title Footnote // . (n.d.). Retrieved February 09, 2018, from https://pcaobus.org/Standards/Auditing/Pages/AS2605.aspx Knapp, M. C. (2018). Contemporary auditing: real issues and cases. Boston, MA: Cengage Learning. Kohn, S. M. (n.d.). National Whistleblower Center. Retrieved February 09, 2018, from https://www.whistleblowers.org/index.php? option=com_content&task=view&id=27 Louwers, T. J., Blay, A. D., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2018). Auditing & assurance services. New York, NY: McGraw-Hill Education. McNally, S. (2013). The 2013 COSO Framework & SOX Compliance: One Approach to an Effective Transition. Strategic Finance. Retrieved February 9, 2018, from https://www.coso.org/documents/COSO%20McNallyTransition%20Article-Final %20COSO%20Version%20Proof_5-31-13.pdf. Post, A. (2011, July 01). SOX whistleblower protections don’t apply to media leaks. Retrieved February 09, 2018, from https://www.law.com/almID/4e0a1182160ba0ec4800042d/? slreturn=20180109183619