2008 Occasional Papers - AUK

Though corruption poses fundamental challenges toboth democratic governance and market economies,accounting researchers have not addressed corruption in acomparative context. In the light of the above discussion,an audit of an MNCs in the Middle East revealed thefollowing journal entries. The MNC is a major supplier ofstructural steel building material to XYZ Limited LiabilityCompany located in the Middle East. The accountant thatmade the entry recalled being told that a loan was grantedto XYZ LLC and no other documentation was presented.Why was this loan given? The response could be a truth.Exhibit One (Loan to a customer XYZ LLC recorded)Loan to XYZ LLC (General Ledger Account)Dr $500,000Cash $500,000Loan granted to XYZ LLC at 21% interestrate per annum.Upon perusing the journal entry, it became apparent thattrust is a valuable asset and the MNC purchased this.Exhibits Two and Three show an innocent sales transaction,however, to a company that was given a loan a few monthsearlier. This poses no problem as major car manufacturerssupport their dealers by providing them with loans.Exhibit Two (Sales to a Customer XYZ LLC recorded)Sales early in quarter one of the first year amounted to$2,837,000 and recorded as a credit sale in the debtors’journal as follows:XYZ LLC (Debtors’ Ledger Account)Dr $2,837,000Sales $2,837,000Structural and processed steel sold on creditExhibit Three (Record of Sales to XYZ LLC)The following sales figures were reflected anddocumentations were provided. Moreover, when creditsales takes place – reasonable assurance of collection mustbe assured – and goods must have changed ownership.Year 1 Quarter 1 $2,837,000 (As reflected above)Quarter 2 $1,938,000Quarter 3 $1,843,000Quarter 4 $1,945,000Year 2 Quarter 1 $1,655,000Quarter 2 $1,452,000Quarter 3 $1,345,000Quarter 4 $1,223,000Payments of various amounts were received from XYZLLLC every quarter over a period of two years. This wasa result of structural steel building materials that weredispatched to XYZ LLC. At the end of quarter one of thefirst year, a payment was received to the value of $2,837,000.The entries were made as follows (Exhibit Four):Exhibit Four (Record of Cash Received from XYZ LLC)Journal Entry as recorded in the Cash Payments Journal:Cash Dr $2,837,000XYZ LLC (Debtors’ Ledger) $2,758,856Loan to XYZ LLC (General Ledger) $51,894Interest received $26,250Cash received from XYZ LLC in respect of goodsInvoiced and part redemption of loan – first quarter.An examination of Exhibit Four shows that the accountantamortized the loan over a period of eight quarters. Thiswas done at times when the cash payment was receivedfrom XYZ LLC. The interest rate of 21% per year (5.25per quarter was applied systematically and methodicallyrecorded as interest received consistent with acceptedpractices. No write off of accounts receivable were made,however, a provision for doubtful debts was maintained at7.5% of accounts receivables.In the middle of Quarter Four of the second year a further$500,000 loan was made to XYZ LLC. Moreover, a luxurysport utility vehicle purchased in year one by the MNCand included in its asset register was given to XYZ LLC.Several non material payments were made by the MNC toXYZ LLC as site visit expenditure.The changing role of accountantsAccountants must come to realize that as long as salesrevenue is going to impact upon earnings, managementwill do everything to tell small truths in the wake of hugelies. In this regard it is vitally important for accountantsand auditors to ensure that the firms are run efficiently, itspublic records kept accurately, and its taxes paid properlyand on time.49