Introduction

The Molex Corporation is an electronic connector manufacturing firm, which is based in Illinois. This company is facing a financial reporting problem in which the financial statements were overstated. Joe King ,the CEO of the company, was appointed in July of 2001, and was responsible for managing and inventory control, among other very important duties. Diane Bullock was hired in 2003, to replace the previous CFO. Both Bullock and King were being accused of what? by the external auditors, Deloitte & Touche, for not disclosing an 8 million pre-tax inventory valuation error.
Financial reporting Problem

The financial reporting problem at Molex was that, “the profit on inventory sales that the company made between its …show more content…

Given that the error of Molex was believed to be immaterial, the CEO and CFO decided not to take the issue to the auditors, since the error wouldn’t have affected the financial performance of the company. Management assumed that since no(t) harm was caused to financial performance or “earnings” the auditor didn’t need to be informed. But the manager had not analyzed the magnitude of the error at the time of its occurrence. The issue was taken to the auditors when managers saw a huge overstatement of $8 mills on net income and inventory.
Auditors Concern about the Problem

The external auditors were very concerned about the error because they were not informed until after the fourth quarter results were released and prior to releasing the first quarter results on September 30, 2004. They were very concerned that they, as external auditors, didn’t see the error, and that the corporate finance group of Molex were the ones who caught it. This made the external auditors look bad because it can seem as if they didn’t carefully test(ed) the financial results, which were presented to them by Molex on July 27, 2004, in order to detect if an error had occurred in the financial statements. Good point. Besides looking inept, the auditors were concerned