FACULTY OF MANAGEMENT
INTEGRATED CASE STUDIES
CASE STUDY’S REPORT:
FINANCIAL REPORTING PROBLEMS AT MOLEX, INC. (A)
LECTURER’S NAME: DR. MAISARAH BT. MOHAMED SAAT
PREPARED BY: GROUP 1
AMIZATUL FARHA BT. AHMAD AZAM
CHIENG KWONG HUNG
NAJWA BT. NAPRI
NURUL AFIQAH BT. ROZAINI
SITI NADIAH BT. KAMARUDIN
TAI PIEK YEE
SUBMISSION DATE: 12TH OCTOBER 2014
Molex Inc was a big company that designed, manufactured and distributed electronic connectors that were used by a wide range of industries. Those industries included the computer industry, the telecommunications industry, the consumer product industry and the automotive industry. In 2003, Molex became the largest firm in the connector industry with a worldwide share of 6.9% , and production and distribution facilities located throughout the world.
The problems began in mid of July 2004, where Molex’s corporate finance group identified a potential problem regarding the inventory that had affected results for several years. Profits on inventory sales between Molex subsidiaries had not been excluded in computing the consolidated firm’s earnings and inventory. Therefore, the amount of earnings, inventory and retained earnings were most likely to be overstated. Thus, meetings between the top management, the auditors, the audit committee and investors were undertaken to discover the misstatements. At first, Diane Bullock brought this issue to the top management at a meeting including Joe King. The decision had been made that they want to investigate further to assess whether and what extent there was a problem. Based on the investigation, the management had concluded that the amounts involved were actually not material. Because of that, King and Bullock had signed the management representation letter and sent it to the external auditor, Delloite and Touche LLP. However, in this letter there was no mention about the inventory error. On October 15, 2004 Molex’s management discussed with the external auditor regarding the error and they proposed the $2 million of the adjustment should be recognized during the current quarter. Due to this, Delloite met with an audit committee to discuss this matter. Delloite disagreed with the management proposal and argued that the entire error amount should be recorded at the first quarter. Because of that, the audit committee requested the management and Delloite to determine the appropriate accounting. Molex had announced about the financial statements but the error would not be disclosed. Besides that, Diane Bullock confirmed that she was awared of the inventory error before she signed the representation letter on 10 September 2004. Bullock and King responded by claiming that the error in inventory account was immaterial and therefore, it did not require any disclosure in the letter. Delloite and Touche was very dissatisfied with this kind of situation especially due to the top management’s representations. They argued that the management had known about this error but then the management decided not to inform Delloite at that time. Because of that, the external auditors were no longer willing to rely on the managements’ representations.
MAIN ISSUES AND DISCUSSIONS
Disclosure of Information
Molex was in trouble when the issue regarding the disclosure of information arises. From the perspective of auditor, the information that has been given to them must meet with new Sarbanes-Oxley Act (SOA) guidelines, whereby management needs to follow the principles which are: 1) honest and ethical conduct (decision regarding conflict of interest involving relationship of professionals or personals), 2) disclosure in full, impartial, precise, timely and explicable manner in...
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