Case Study 2.docx - Meredith Sawyer ACCT 562 Analysis of...

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Meredith Sawyer ACCT 562 Analysis of Fraudulent Financial Reporting by Safenet, Inc. Types of Fraud Committed Management or Financial Statement Fraud – Argo committed financial statement fraud at SafeNet through the backdating of stock options. Under Generally Accepted Accounting Principals (GAAP), backdating stock options is allowed but the practice must be properly disclosed in the notes of the financial statements. In addition, the difference in the stock price amount between the actual grant date and the backdate of the option must be recognized as compensation expense, which reduces net income. Safenet’s financial statements did not disclose the practice of backdating stock options, nor did it recognize the difference in the stock option prices as compensation expense. Therefore, Safenet’s financial statements were both materially misstated and did not include the proper disclosures required by GAAP, which constitutes financial statement fraud. Corruption – Corruption can be generally defined as people abusing their positions of power for their own personal gain through unethical or fraudulent activities. Argo abused her position of power within Safenet while acting as the President, COO, and Interim CFO. She used her power to influence decisions regarding the recipients, number of options, and exercise price of company stock option awards. She then concealed the excess compensation that should have been reported by omitting it from the financial statements. Lastly, she certified that the financial statements had no material misstatements and that the internal control system of the company had no material weaknesses. Elements of the Fraud Triangle Pressure – The first pressure Argo faced was that she needed to make sure that Safenet met its earnings expectations, otherwise she may lose her job. The second pressure she faced was that her compensation was largely based on stock options, so she had great incentive to keep the company’s stock price high. Opportunity – Argo had the opportunity to commit fraud because she was responsible for all accounting, finance, and treasury functions. She recommended the stock options awards to the Board of Directors’ Compensation Committee and prepared the paperwork for them to approve. Then, she put together the financial statements without the required

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