Cost of Quality: Financial Reporting Issues
Consider adapting the cost of quality framework to financial reporting issues. Assign costs to one of four categories: prevention (P), appraisal (A), internal failure (IF), and external failure (EF), where the categories refer to financial reporting activities and the consequences of poor, or even illegal, financial reporting.
Required
Classify the following costs incurred for financial reporting activities into the four categories.
a. Extra work done by external auditors to complete the audit because new employees made a lot of errors.
b. Effects of bad publicity on stock prices because publication of financial statements was delayed in order to correct errors in the statements.
c. Employee training: new accounting regulations.
d. Drop in stock price from bad publicity after the chief executive gets sentenced to 10 years in prison.
e. Fines for failing to comply with accounting regulations.
f. Design of information systems to keep out hackers.
g. Design of internal control systems to minimize errors in data entry.
h. Internal auditors’ review of internal controls in item (g) above.