NEXTCARD, INC

Nextcard, Inc. Case Study

Nextcard, Inc. Case Study

Question 1

The AICPA has a long history of advocacy on behalf of the public interest, including investors and the markets. Our advocacy regarding the regulation of the auditors of broker-dealers is a good case in point.

Under the Dodd-Frank Act, the Public Company Accounting Oversight Board was given the authority to conduct inspections of auditors of broker-dealers. The Institute does not believe, however, that PCAOB registration and inspection should apply to the auditors of introducing or non-carrying broker-dealers, who have no or very limited access to client funds and, as a result, do not pose the kind of risk to investors or the markets that would warrant PCAOB oversight.

Fraud and theft can exist in many forms such as Ponzi schemes intended for personal enrichment or to cover up mismanagement. The integrity, or “tone at the top” demonstrated by senior management within a company can serve as an indicator of the likelihood that management would commit fraudulent financial reporting and also an indicator of heightened risk of theft or fraud by employees.

Fraud schemes are more likely to be present in entities lacking a robust internal-control environment, such as a lack of segregation of duties. Poor segregation of duties within processes (i.e., accounts payable, accounts receivables, cash, payroll processing, etc.) provides opportunities for employees to perpetrate fraud. A lack of segregation of duties also may arise when a company has an insufficient number of employees. For example, the opportunity to steal cash and conceal the theft increases if a company does not have separate employees handling cash receipts, preparing deposits and performing bank account reconciliations. Similarly, poor controls over inventory, including company equipment, may be circumvented by employees, leading to possible abuses.

Question 2

There are specific fraud risk factors that were apparently present during the 2000 NextCard audit. Those fraud risk factors are listed below.

NextCard's management team did not have a good internal audit team set up. NextCard also was not honest about the accounting reports.

NextCard's management made financial promises to financial analysts regarding their company's future earnings goals. NextCard's management would always tell the financial analysts that there would be profit on the next quarter. NextCard's recurring operating losses weakened the company's financial condition.

NextCard operated in an industry that was dominated by a few financially strong and high profile companies. Not only was the industry dominated by a few financially strong and high profile companies but it was a complete new industry.

The bursting of the Internet bubble in the stock market limited NextCard's access to the debt and equity markets. Since NextCard was limited access to the debt and equity markets

Auditors have an obligation to make sure that financial statements are free of material misstatement whether caused by error or fraud. There are things that auditors can do to try to catch their clients off guard. An audit firm can perform audit procedures at locations on a surprise or unannounced basis, request that the client's inventories be counted at year-end or as close to year-end as ...