A Case Study Report

Failed Audit: The Humiliation of PricewaterhouseCoopers and

Doubts Hound KPMG following 2GO Accounting Scandal

Members: Fajardo, Rian Miguel, Lozano, Nariela, Perez, Ryan James, Tamano, Janelle Elaine,
Visaya, Ken O’briel, Yen, Juliana Fiel (GROUP 8)

A. PricewaterhouseCoopers

1. What is the nature of the fraud reflected in the audit?

They had committed financial statement fraud wherein they had certified Microstrategy’s
financial statement, rejected it, and then contradicted it later on a news release. This was
concerning to the stakeholders because of the misleading information provided by the
accounting firm.

The company did not even consult experts which can be linked to hidden agenda. Microstrategy
overused their privileges granted to them for two years of being a software and Internet
company and as a Wall Street darling. The fraudulent certification made them so reluctant and
conceited.As we all know that in order to expand your business earning the trust of your
shareholders would be one priority, you should be consistent and honest, and in this case study
PricewaterhouseCoopers failed to consult a third party’s expert advice to validate the accounting
report of Microstrategy, causing confusion and a possible hidden agendas.

2. What do you think is the Audit opinion given by PricewaterhouseCoopers? Is this the
right opinion?

They had given a disclaimer opinion, contradicting the previous statement they had given. This
would not have been the right one as it causes confusion among shareholders due to the
conflict in information. An honest opinion may have been better.

Being a reputable acting firm, the company should have followed the accounting rules
regardless of the situation that they are in or whom they are working with. An accounting firm
should be Honest at all cost when conducting an accounting report, they should follow the rules
regardless of the privilege they were given, the accounting firm should be consistent in how they
create account reports. They should avoid confusion within information for it should be validated
before finalizing. Bi giving a disclaimer opinion and a contradicting statement this causes
confusion among shareholders having conflict in information presented.

3. How do you describe the communication between the audit branch and the main office
of the audit firm?

The communication between the branch and the main office was non-existent for this event, as
there was no record, or evidence of any communication having gone on between them.
Furthermore, due to this lack of communication, the main office was unable to become involved,
and resolve one of their biggest accounting fiascos.
And this kind of relationship is discouraged in the accounting rule.Since in the accounting rule
there is a dual aspect principle where the relationship should be reciprocal between the
accounting firm and the company. The accounting branches should forward all the results of the
accounting report to the main branch for the synchronization of the report in the database, so all
reports are transparent. The reports given should be supplied with a copy of the company being
audited.

4. What accounting principle or principles has/have been violated?

Revenue Recognition, Verifiability, Dual Aspect Concept, Faithful Representation and Full
Disclosure.

Whatever is in the auditing book as declared, audited and re audited by the third party should be
an open book and both parties should be aware of. And these are the violated accounting
principles: First is the Revenue Recognition, Second violated accounting principle is the
verifiability, Third would be the dual aspect concept, Fourth is the faithful representation, Lastly
full disclosure.

Revenue Recognition = this tates that a revenue should be recognized in the financial reports
at the period when they are realized and earned regardless of collection, so the revenue should
be recorded with or without cash which should be recorded as accounts receivable but the
company Microstrategy failed to present their record of incomes.

Verifiability = Which needs a proper investigation by the accountant before publishing, which
the company's accountant failed to do so before finalizing and handling their documents to the
auditing firm, an account it should be verified and confirmed the authenticity of the account,
considering that there are 2 ways of verification, the indirect and direct way, both parties neither
do any of the verification process.

Dual Aspect Concept = because when you're doing an auditing of a certain company, they
should be equally aware of the auditing process and the result of the auditing, since in this
principle it is stated that every transaction should be recorded, which they did not provide.

Faithful representation = This was proven with the change of their declaration and statements.
There was no representation from the company; MicroStrategy every time they will do the
auditing or release any news from the Media or to the board.

Full disclosure = This concept requires and necessary for both parties to give full information
and disclosure to fully understand the report including the financial reports. If not for Mr. Howard
Schilt, who runs the Financial Research and Analysis Center, but for PricewaterhouseCoopers,
Failure of disclosure to the company would have not been discovered and be put to question
regarding the rule of Full Disclosure.
B. KPMG RG

1. What is the nature of the fraud reflected in the audit?

2GO committed financial statement fraud, as their numbers were misrepresented. This was
shown in an audit with their statements, as they were far lower in reality than in their statements

The numbers they have presented is far from the truth, the fear of not having the investors and
the thought of they have to gain more and more, they did the deed of fooling their statements
and themselves which is not right, they were drown in the thought of i have to gain because i
have to gain and disregarded the fact that they have to be true to their statements. They stuck
to the old beliefs of their field, they stuck to the Profit Maximization.

2. What do you think is the audit opinion issued by KPMG RG? Is this the right opinion?

They had given a clean report, giving their intents and appropriate details on the depth of the
situation. The details given regarding the issues of their client were concise yet appropriate, not
revealing any details that they did not have to, but just enough to clarify the matter.

3. What is the effect on Dennis Uy and SM Investments of this audit, given that they
acquired a stake in 2GO?

The effect of this audit and the uncovering of the fraud is that their belief of the value of their
investments have been turned over. The true value of their investments into 2GO are actually
worth far less, as the value was bloated and misrepresented in the reports

4. What accounting principles/principles were violated?

Faithful Representation: (Completeness,Neutrality, and, Free from Error)

Faithful representations of financial reports were violated. 2GO had failed to show a clear
picture of the results of operation and condition of the business. And also violated concepts
under this principle which are: Completeness, Neutrality, and Free from Error.

Faithful representation = Under the principle of faithful representation, which states that the
descriptions and figures must match what really happened, the 2GO were not able to comply
with this principle as their "income" is far from the real income they have acquired during those
times.

Completeness = Completeness facilitates understanding and avoids erroneous implications. All

of the information that is necessary for the users (investors, management, etc.) to understand,
must be written down including all of the necessary explanations and descriptions, which were
not able to be facilitated by the 2GO, as they recorded fake "incomes" to bait the investors.

Neutrality = 2GO was being biased, biased on the side of gain. Neutrality must not be
manipulated to increase the probability of the financial information to receive the favorable side
of it's users. 2GO wants to increase its investors to the point that their income is overstated.
Free from Error = Free from error means that there are no errors in the description of the
transactions. Accounting doesn't give 100% accuracy, but it gives reliable information to come
up with better economic decisions. The investors invested a large amount of money with the
thought in mind that what they have presented is free from any malice intent. They have added
a lot of information that has not been recognized by their company itself which violated the
International Accounting Standards.

Synthesis question: Are there any similarities in terms of the audit process or practice
conducted by PricewaterhouseCoopers and KPMG RG?

None, KPMG RG had been more thorough and open with their process, as the first report they
gave was also the final, according to this paper. Unlike PricewaterhouseCoopers, KPMG RG did
not release a second contradictory statement, and was even open about what had happened
with the misrepresented numbers of 2GO.

PricewaterhouseCoopers, unlike KPMG RG, was not thorough, and took only the details on the
surface for their audit, resulting in a faulty statement, which later needed correction. KPMG RG
gave all the appropriate details needed in their statement, not to mention that their investigation
during the audit ensured that their first statement would not be faulted.