From: Man Fun Daniel Yeung, Seung Kim, Young Jae Lee, Max Kirsch
Date: Oct. 18, 2010
Re: Financial Reporting Problems at Molex, Inc.
This report discusses Molex, Inc.’s conflicts with its auditor, Deloitte and Touche, over a reporting issue in 2004. The report explains the details of the firm’s issue while also addressing the intentions behind Molex’s decisions, Deloitte’s concerns, and the resolutions for the conflict.
In mid-July 2004, Molex’s corporate finance group identified an on-going accounting issue within the firm: for several years, Molex had mistakenly recognized “profits on inventory sales between Molex subsidiaries (but which had not been sold to …show more content…
Earnings measurements such as net income are probably the most relevant. In this case, Molex’s before tax adjustments for the fiscal year ending on June 30, 2004 was $3 million while its net income for the same year was about $64 million; the size of the adjustment was 4.7% of net income. Thus, the adjustment was material because its size was large enough to have significant influences on investors’ decisions.
Between 2002 and 2003, the auditing industry went through dramatic challenges. Fraud cases such as the Enron and WorldCom scandals significantly degraded investors’ trust for the auditing firms. Following Arthur Anderson’s collapse, the SEC also passed the Sarbanes Oxley Act of 2003. The act especially created the Public Company Accounting Oversight Board to monitor auditing firms. Therefore, at the time of Molex’s accounting issue, Deloitte was highly sensitive towards any miscellaneous errors that may have fraudulent intents. When Deloitte discovered that Molex’s management team signed the representation letter without notifying it of the reporting issues, the auditing firm was highly unsatisfied with Molex’s dishonest behavior. Furthermore, when Molex finally reported adjustments in its first quarter report, the firm’s decision to neglect any explanation for the error made Deloitte auditors extremely concerned.
The make-up of Molex’s board of Molex’s board of directors also exacerbated Deloitte’s