| Course | ACC 423 Detection/Prevention Fraudulent Financial Statements |
|---|---|
| Module | Module 5 |
| Paper type | undergraduate corporate governance assignment on audit committee oversight and SOX |
| Length | About 1,000 words, 6 pages |
| Format | APA 7 student paper |
| School | Southern New Hampshire University |
| Program | BS Accounting |
| Updated | October 2026 |
Free sample paper for ACC 423 Module 5
Independent in Name Only? Evaluating the Audit Committee of a Composite Water Heater Maker
[Student Name]
Southern New Hampshire University
ACC 423: Detection and Prevention of Fraudulent Financial Statements
Module Five Assignment
[Instructor Name]
[Date]
The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.
Independent in Name Only? Evaluating the Audit Committee of a Composite Water Heater Maker
Introduction
The audit committee at this water heater maker approved the year-end earnings release and the annual report with fourth-quarter revenue inflated by about $12.6 million and pretax income overstated by about $10.5 million through reserve and capitalization choices. No member asked about either. This assignment evaluates whether the committee was structured and run to provide the oversight the law and listing rules expect, and what it should have done with the information in front of it (Rezaee, 2005).
Composition: Independence and Expertise
The committee has three members. The chair is a retired regional bank executive who has no business relationship with the company and meets the formal independence tests. He is also the CEO's college roommate and godfather to the CEO's son. The designated financial expert, a former CFO, now owns a plumbing distributorship that buys about $3 million of water heaters a year from the company. The third member, an engineering professor, is fully independent but joined six months ago and has no accounting background.
On paper, the committee satisfies the rules. In practice, its independence is weak. A close personal friendship with the CEO is not a disqualifying relationship under listing standards, but it makes it harder for the chair to challenge the CEO's account of a strong quarter. The financial expert's distributorship is a customer; even if its purchases fall below the thresholds that would disqualify him, he has a commercial interest in the company's pricing and terms, the very areas the channel stuffing involved. Beasley (1996) found that firms committing financial statement fraud had boards with significantly lower proportions of outside members than no-fraud firms, and Klein (2002) found that earnings management is associated with audit committees less independent of management. Formal compliance does not guarantee the effect those studies measured.
The Committee's Duties
Under the Sarbanes-Oxley Act the committee, not management, hires, pays and supervises the outside auditor, requires its members to be independent and requires it to establish procedures for receiving complaints about accounting matters, including confidential submissions by employees. Listing rules add a written charter, regular meetings and review of quarterly and annual results. Together these place the committee between management and the auditors as the users' representative.
Two reports should have prompted questions. The CEO and CFO signed certifications under Section 302 stating that the report was accurate and that they had disclosed any fraud involving management or employees with significant roles in internal control. And management's assessment of internal control over financial reporting, required by Section 404, reported no material weaknesses even though nonstandard sales terms were being granted without finance review. A committee that reads these documents as formalities provides no check.
Five Questions the Committee Never Asked
1. To the CFO: Fourth-quarter shipments to distributors were three times normal in the last two weeks. What terms were offered, and were any terms granted outside the standard contract?
2. To the CFO: The warranty accrual rate fell from 2.4 to 1.8 percent while the service department reports rising claims from the valve change. What evidence supports the lower rate?
3. To the external audit partner: Did you identify any significant unusual transactions or changes in estimates near year end, and do you agree with management's conclusions?
4. To the head of internal audit, meeting without management: Have you received any concerns about sales practices or quarter-end shipments?
5. To the CEO: How much of the year's earnings per share came from the fourth quarter, and how does that compare with prior years?
Each question targets a red flag already visible in the information the committee received. None requires forensic skill, only the willingness to ask and the independence to follow up when the first answer is vague or the documents do not match the explanation.
What the Auditors Owed the Committee
The committee was not the only party with information. Auditing standards require the external auditor to communicate to the audit committee significant accounting policies and estimates, any disagreements with management and any matters of fraud or illegal acts that come to its attention. Had the auditors raised the warranty rate change as a significant estimate, or the quarter-end shipments as a significant unusual transaction, the committee would have had a direct prompt. Their communication letter mentioned neither, because the cutoff work that found the side letters was not completed until after the earnings release. That timing is itself a governance lesson: a committee that approves an earnings release before the auditors have finished their year-end procedures is relying on management alone. The recommended changes below include aligning the release date with the audit timetable so that the committee hears from the auditors first.
Recommended Changes
The board should replace the chair with a director who has no personal ties to management, and appoint a financial expert with no commercial relationship with the company. The committee should meet at least six times a year, including private sessions with the external auditor and internal audit at every meeting. It should require management to present, before each earnings release, a schedule of quarter-end revenue concentration, nonstandard terms and changes in significant estimates. It should confirm that the employee hotline reports directly to the committee chair, not to the general counsel's office, which reports to the CEO. And it should commission an independent review of the fourth-quarter transactions before the annual report is filed.
Conclusion
The audit committee complied with the form of the rules but not their purpose. Personal and commercial ties weakened its independence, and its members did not question certifications and reports that contradicted visible red flags. Five direct questions, asked of the CFO, the auditors and internal audit, would likely have surfaced the schemes before the earnings release. The recommended changes aim to make that kind of questioning routine, so that the next strong quarter is examined before it is celebrated and the committee's minutes show what it asked and what it was told.
References
Beasley, M. S. (1996). An empirical analysis of the relation between the board of director composition and financial statement fraud. The Accounting Review, 71(4), 443-465.
Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics, 33(3), 375-400. https://doi.org/10.1016/S0165-4101(02)00059-9
Rezaee, Z. (2005). Causes, consequences, and deterence of financial statement fraud. Critical Perspectives on Accounting, 16(3), 277-298. https://doi.org/10.1016/S1045-2354(03)00072-8
What the ACC 423 Module 5 instructions ask for
The Module Five assignment in ACC 423 usually asks you to evaluate corporate governance at a company involved in, or at risk of, fraudulent financial reporting. Expect to examine the board and audit committee's composition, independence and expertise, the committee's responsibilities under the Sarbanes-Oxley Act and stock exchange rules, the officers' certifications and the internal control reporting requirements. Many versions ask what the committee should have done differently and what reforms you would recommend. Tie each governance requirement to the specific scheme in the case rather than listing sections of the Act, and support your evaluation with research on how board and committee characteristics relate to fraud and earnings management.
How this ACC 423 Module 5 corporate governance assignment example is built
The sample evaluates a three-member audit committee. The chair, a retired banker, is the CEO's former college roommate and godfather to his son. The designated financial expert owns a plumbing distributorship that buys water heaters from the company. The third member is independent but joined only six months ago. The committee met four times, each for about an hour, and approved the year-end release without asking about the shift to fourth-quarter shipments or the warranty rate change. The paper explains the committee's duties under the Act and Nasdaq rules, shows how the CFO's certification and the internal control report should have prompted inquiry, lists five questions it never asked and recommends governance changes.
Where the ACC 423 Module 5 rubric puts the points
Rubrics for the ACC 423 governance assignment typically score the evaluation of independence and expertise, the explanation of audit committee duties under the Sarbanes-Oxley Act and listing standards, the link between governance failures and the scheme, the use of research and the recommendations. Top papers distinguish formal independence under the rules from practical independence, explain what the committee was expected to do with the information it received, and propose specific changes with reasons. Graders reward analysis showing how a governance step would have exposed a specific red flag. Common deductions include listing SOX sections without application, treating any independent director as effective oversight, and recommendations too general to implement, such as improving tone at the top.
ACC 423 Module 5 help: the mistakes that cost points
Governance papers usually lose points by reciting the Act section by section without asking what the committee in the case actually received and failed to question. Another frequent gap is ignoring relationships that technically pass independence tests but compromise judgment, such as close personal ties. If your case involves a private company, a nonprofit board or a company with no audit committee, the same oversight questions apply in a different form, and the analysis can be adapted to your entity. Write the questions the committee should have asked as actual questions, addressed to named officers, because that is the most practical test of whether you understand the committee's role.
Get ACC 423 Module 5 written to your instructions
Share the ACC 423 Module 5 case and instructions, and we will assess the committee's composition and duties, connect the governance requirements to the scheme in your case and set out the questions and reforms that would have made a difference. The first request is free, and most are ready in two days. The paper above is an original model document written by our desk, not a submitted student paper and not an official Southern New Hampshire University document.
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ACC 423 Module 5 questions, answered
Where can I find a free ACC 423 Module 5 corporate governance sample?
This page carries a full ACC 423 Module 5 assignment evaluating an audit committee's independence, duties and missed questions under SOX.
What does the Sarbanes-Oxley Act require of audit committees?
Members must be independent, the committee must appoint and oversee the external auditor and establish procedures for complaints, including confidential employee concerns, about accounting and auditing matters.
What is an audit committee financial expert?
A member with an understanding of GAAP, experience preparing or auditing comparable statements, and an understanding of internal controls and audit committee functions. Companies must disclose whether one serves.
What are SOX Section 302 certifications?
Quarterly and annual certifications by the CEO and CFO that the report is accurate and that they are responsible for disclosure controls and have disclosed significant control deficiencies and any fraud involving management.
Do independent directors reduce financial statement fraud?
Research has found that boards with a higher proportion of outside directors and independent audit committees are associated with lower likelihood of fraud and less earnings management.