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Financial Reporting Problems at Molex, Inc: Audit Issues

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Use the "Financial Reporting Problems at Molex" (Harvard Business School, no. 9-105-082) case by Paul Healy for the following questions.

1. Why does Molex have to hire an external auditor?

2. What was the financial reporting problem at Molex? How would the correction of the problem be recorded in Molex's financial statements?

3. What factors do you think influenced management's decision not to raise the issue with the auditors?

4. Why were Molex's auditors so concerned about the reporting problem at Molex? If you were a member of the board, would you agree with their concerns?

5. As a member of Molex's board, what would you do to respond to the auditor's request that the CFO (and possibly the CEO) be replaced?

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Solution Summary

The solution provides answers to the financial reporting problems at Molex, Inc. regarding auditing issues.

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Why Molex has to hire an external auditor:

Molex hires an external auditor to conduct third party independent reviews of all the financial records of the corporation objectively in order to ensure effective and correct financial reporting. The external auditor is able to provide an unbiased view of the various financial records and reports with a company. External auditors who often do not have any stake or interest in Molex provide more authoritative and unbiased reports on the validity of the financial condition of a company, thereby assuring investors on the attractiveness of the company's stock. Molex also has to hire an external auditor since under the Sarbanes Oxley act, a public company can only file its financial results with Securities Exchange Commission if the financial results have been reviewed and confirmed by external independent auditors (Case Study, n.d.; Arens, Elder, and Beasley, 2003).

The financial reporting problem at Molex and how the correction of the problem would have been recorded in the financial statements:

The financial reporting problem at Molex was that the profit on inventory sales that the company made between its subsidiaries but which had not yet been sold to external customers had not been excluded from the company's consolidated earnings and also in the company's inventory. In essence Molex reported extra net earnings and inventories from the internal inventory sales that were done in the company. This implies that the net income, earnings and inventory of the company were overstated by $8 million before tax and 5.8 after tax with $3 million of these being from the year ended June 30, 2004. Having released the financial results on July 21st 2004 without mentioning the error either to the public to its external auditor was the major ...

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