The Collapse of Quintis Ltd

1. Summarize the key issues associated with the Quintis Ltd financial collapse

            The collapse of the Quintis Ltd was linked to a wide range of issues. A report by Glaucus Research Group in March 2017 forecasted that the company would experience financial downfall. After the report was released, the value of its shares started to decline from $1.41 to approximately $1.10 within a short period (Glaucus Research Group 2018, p.1). Moreover, the report was skeptical of the independence of the “external experts” whose predictions of expected prices and harvest in the future were used in the disclosure statements of the product. It highlighted apparent discrepancy in the supposition that the future scale of the company output as compared to a limited market for sandalwood products could not flood the market and minimize attainable prices (Davis and Herkes 2018, p.10). Moreover, the report revealed that latest purchases of yields from the 2000 MIS plan by the firm were intended to falsely elevate the prices in the market to be more constant with the earlier estimates of Quintis Ltd. The values provided by the company were questionable because of the positive quality predictions, the narrow international market for sandalwood as compared to the estimates of the firm output volumes, and falsely exaggerated auction prices in the 2015 yields of the 2001 MIS plan emerging from the firm purchases (Albrecht et al. 2016, p.3). Furthermore, the reports also discovered non-disclosure of canceled contracts.

            Additionally, the firm had recorded high debt financing which meant that interest payments were becoming unsustainable and quite high as compared to its ‘cash’ profits. In this regard, it implied necessity for other financing operation and the possibility of a fraudulent cycle (Glaucus Research Group 2018, p.1). One foundation of such rising leverage was the utilization by MIS investor/grower of choice to give way for yearly maintenance payments in return for a forward sale of a percentage of their timber after harvesting to Quintis, forcing the company to generate resources for continuing plantation maintenance (Davis and Herkes 2018, p.5). The approach of Quintis involving the buying back the interests of growers in MIS contributed to high levels of debt financing. It also facilitated the lack of transparency and discrepancy of MIS real returns as compared to what has been projected (Glaucus Research Group 2018, p.3). Finally, the firm was hit with cash flow challenges which forced its collapse hence it could not meet its obligations.

2.    Based on the analysis by Glaucus Research Group, and other sources you found, describe three potential fraud symptoms that a forensic accountant should investigate further.  What evidence should the accountant seek to obtain to determine whether a fraud has occurred or not?

            Organizations such as Quintis are susceptible to fraud hence forensic auditors must understand the symptoms of dishonest activities. Some of these symptoms include the existence of unusual procedures or processes in the accounting system, weaknesses in internal control, and analytical anomalies (Lingard and Perry 2018, p.10). Firstly, the unique methods or procedures in the system can encompass ledger inaccuracies, faulty entries in journals, and issues with source documents. Some of the prevalent indicators of fraud in the source document such as receiving, purchase, and order reports, sales invoices, and checks can include documents alterations, provision of photocopied documents rather than originals, and the sequences of materials do not make sense or are out of order (Han 2016, p.13). Other indicators include stale or increased reconciling items, and second endorsement or handwritten checks. Perpetrators can utilize defective journal entries to hide theft (Comer 2017, p.12).  It mainly comprises journal entries recording, hence raising the expense accounts and reducing the cash accounts to hide corrupt payments (Wong and Venkatraman 2015, p.2). For instance, the accountant can see unsupported journal entries and unexplained changes to revenues, payables, and receivables (Glaucus Research Group 2018, p.3). Moreover, errors in the ledgers must be examined primarily in cases involving changing of accounts payable or receivable.

            Weakness in the internal control is a symptom of fraud. Some of these include inadequate systems of account, inexistence of physical safeguards, weak access control of computers, inadequacies in duty segregation, and unavailability of independent approvals and checks. In some instance, the executive overrides the current restrictions (Lingard and Perry 2018, p.23).

            Analytical anomalies are the typical type of fraud symptoms. Precisely, infrequent analytical associations represent such anomalies. Organizations must act analysis of financial data to assess the unusual relationships that must serve as ‘red flags’ pointing out possible fraud (Comer 2017, p.19). For instance, it may involve the rise in the expenses without upsurge of services rendered, amplified revenues with substance decline in receivables, and raising revenue with the substantial decrease in receivables, and an upsurge in revenues with declining cash flows (Davis and Herkes 2018, p.10).

3.    Review the disclosure of Key Audit Matters (KAMs) by Ernst & Young in their audit report for 2017.  Have these disclosures benefitted shareholders? Should other matters have been disclosed?

            The Ernst & Young released an audit report for 2017 highlighting the need for enhanced audit reporting intended to deliver transparency in the disclosure of Key audit matters (KAM). A substantial change that initiates a new kind of clarity into the process of auditing is the provision of disclosure of KAM. The final standards of reporting lack a KAM reporting instruction at the moment (Ernst & Young, 2017, p.1). Nonetheless, they permit regulations or law to demand disclosure of KAM and for accountants to choose to do so. KAM also helps auditors to deliver informative and more transparent reports on the firms they audit. More importantly, it comprises a judgment-based framework of deciding to assist auditor choose which concerns from the audit. In this respect, would have the power to handpick KAMs from issues that need ‘significant audit attention.’ Specifically, they should openly pay close attention to areas where there may be a significant threat of material misstatement or those where the substantial executive or accountant judgment were engaged (Ernst & Young, 2017, p.9).

            The disclosure of KAM would be instrumental in helping the stakeholders because it would encourage accountants to focus keenly on areas such as goodwill and investment (Ernst & Young, 2016, p.11). Besides, it would empower the auditors to assess the menace of material misstatement in various financial statements. Through this requirement, the accountants would be able to detect the prevailing risks. For instance, the provisions such as ISA 701would help auditors to use their professional judgment to communicate KAM (Ernst & Young, 2016, p.11). The disclosure of KAM must be understandable, concise, clear and entity-specific. It describes the reason why the issue was regarded as significant in the audit and the way it was addressed.

4.    Discuss whether, in your opinion, the auditors have fulfilled their statutory duties with regard to the 2016 and 2017 audits.

            Based on the 2016 and 2017 audits, auditors have fulfilled their statutory duties. The statutory responsibilities are optional based on the domestic laws (Ozili 2015, p.3). The Australian Securities and Investment Commission Act 2001 has established the Auditing Standards which are similar to ISA 701 intended to facilitate quality of the audits. Moreover, the KAM disclosure depends on the local regulations or laws (Ernst & Young, 2016, p.1). Over 70 percent of institutions have delivered their initial KAM offering significance and prominence. Some of the factors facilitating auditor’s compliance with the statutory duties include demands in the industry on issues such as intangibles and goodwill, acquisitions, revenue, and taxation (Wong and Venkatraman 2015, p.5).

Conclusion

            The collapse of the Quintis Ltd highlighted the role of fraud in the financial statement. The company failed after its shares declined to $1.10 from $1.41 after the Glaucus Research Group report. The firm used the fraudulent process to forge its financial statements and artificially set the prices of the sandalwood. Moreover, the values provided by the company were questionable because of the positive quality predictions, and the narrow international market for sandalwood as compared to the estimates of the firm output volumes (Comer and Stephens 2017, p.12). Furthermore, the company had recorded high debt financing which meant that interest payments were becoming unsustainable and quite high as compared to its ‘cash’ profits. Therefore, the company was involved in fraudulent cycle aiming to meet new financial obligations. The approach of Quintis involving the buying back the interests of growers in MIS contributed to high levels of debt financing (Comer 2017, p.17). The auditing process also failed to promote transparency hence the company was unable to meet its projections. Some of the fraud symptoms include the existence of unusual procedures or processes in the accounting system, weaknesses in internal control, and analytical anomalies. The disclosure of KAM can benefit shareholders because it provides an opportunity for the auditors to use their professional judgment to identify risks.

References

Albrecht, C., Holland, D.V., Sanders, M.L. and Albrecht, C.C., 2016. The debilitating effects of fraud in organizations. In Crime and Corruption in Organizations (pp. 183-206). Routledge.

Comer, M.J. and Stephens, T.E., 2017. Deception at work: investigating and countering lies and fraud strategies. Routledge.

Comer, M.J., 2017. Corporate fraud. Routledge.

Davis, K. and Herkes, H., 2018. Agribusiness MIS Failures: Policy lessons from the Quintis failure [online]. Kevindavis.com.au. Available from: https://kevindavis.com.au/secondpages/acadpubs/2018/Text%20-%202018-07-01.pdf [Accessed 11 Sep 2018].

Ernst & Young, 2016. Enhanced auditor’s reporting Assurance – Special edition [online]. Ey.com. Available from: https://www.ey.com/Publication/vwLUAssets/EY-adoption-of-new-auditors-reports-july-2017/%24File/EY-adoption-of-new-auditors-reports-july-2017.pdf [Accessed 11 Sep 2018].

Ernst & Young, 2017. Adoption of new auditor’s reports AASB and PCAOB approve new standards [online]. Ey.com. Available from: https://www.ey.com/Publication/vwLUAssets/EY-enhanced-auditors-reporting/$FILE/EY-enhanced-auditors-reporting.pdf [Accessed 11 Sep 2018].

Glaucus Research Group, 2018. COMPANY: TFS Corporation Limited / Quintis│ ASX: TFC / QIN [online]. Diebewertung.de. Available from: https://www.diebewertung.de/wp-content/uploads/GlaucusResearch-Responds-to-TFS-Quintis-QIN-TFC-Mar_29_2017.pdf [Accessed 11 Sep 2018].

Han, J., 2016. The“ anti-fraud moment”: fighting fraud demands more than just awareness. Internal Auditor, 73(1), pp.35-37.

Lingard, K. and Perry, M., 2018. An assessment of the regulatory framework of the Western Australian sandalwood industry. Australian Forestry, 81(2), pp.89-101.

Ozili, P., 2015. Forensic Accounting and Fraud: A Review of Literature and Policy Implications.

Wong, S. and Venkatraman, S., 2015. Financial accounting fraud detection using business intelligence. Asian Economic and Financial Review, 5(11), p.1187.