Molex Accounting Case Analysis

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(3) The influence to variation trend

If one financial reporting issue can change the variation trend of income or other important financial elements, it should be considered to be material. For example, if a misstatement can change the income from negative to positive, it should be material.

4. What’s the relation between management, the board, the audit committee, and the external auditors in financial reporting?

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Here’s a picture showing the relationships among the board, management, the audit committee and the external auditors. As we can see, the audit committee is a part of the board, which is in charge of the appointment and removal of the external auditors. The audit committee and external auditors should communicate and collaborate with each other in order to complete high quality financial report. Also, the audit committee should coordinate the relationship between management and external auditors when conflicts arise. Management, appointed by the board should provide all the information external auditors need, while the external auditors provide advice to perfect the financial report.

5. As a member of Molex’s board of directors, what would you do?

Our decision: Remove the Bullock while keep King, and the board should include“Financial Expert”into the Audit Committee .

(1) Why have to remove one and keep one?

Cause to satisfy the auditor, it’s not possible that the board don’t remove either King or Bullock, as the auditor claimed before that they would only be satisfied when new CEO and CFO are selected and both King and Bullock are having no influence over financial reporting or internal controls. As we discussed before, what the auditor cares isn’t this $8 million pre-tax inventory error, but their reputation, under the circumstances of a overall Industry credit crisis. Even a little stain would alert the audit. In the one hand we should keep negotiating with the audit and clam them down by remove the Bullock. But we just can’t fire King, for his extensive knowledge and his success. Anyone in the company has problems, but I think his action is intolerable. We should allow King continues to act as CEO.

(2) Why should the board continuously cooperate with Deloitte&Touche?

Cause we can’t afford either delisted or translated to the NASDAQ SmallCap Market or file an 8-K to the SEC，this may destroy our company’s prospect and value. $8 million has been checked as being immaterial, and we can see that our management improved and earning growth. (In first quarter of 2004 (ending September 30, 2004) revenue had increased by 29 percent for the first quarter of 2003. Gross profit margin was 35.7 percent for the first quarter of 2004 compared to 33.8 percent for the first quarter in 2003). Last but not least, our board owns stocks and options, delisted or translated to the NASDAQ SmallCap Market would harm the board’s interest.

(3) Why should to board turn to include a new “Financial Expert”into the Audit Committee ?

We notice in the note that the Moles’s Audit Committee doesn’t have a “Financial Expert”,but this is actually SEC rules. This is the board's mistake, we should solve it immediately. We should be responsible for our investors as we have claimed in the Proxy Statement.”Given the level of sophistication and business experience of the audit Committee members, the board of directors believe the Audit Committee members can perform the audit committee functions as required.