Nec weak internal control contribute to Nasdaq delisting

Founded in July 17, 1899
Nippon Electric Company, Limited – renamed NEC corporation effective April 1983, both expressed as NEC hereafter
Sec filing is mandatory
NEC announced it could not complete financial analysis required by Sec due to employee fraud
Problem at hand
Problem num 1: in 2006 NEC manager had been fabricating $311 million in business deals from 2002. Manager had access to all things necessary to falsify deals. Nec did

not provide separation of duties, audits, forced vacations.

Problem num 2
In 2006, 10 employees were involved in fraudulent transactions amounting to $18 million. Employees gained 4.1 million in kickbacks. Employees that crated the false

deals were the same that confirmed them.
Present solution
NEC established an internal control system and confirmation is carried out by a 3rd party administrative division
Nec could never catch up with SEC and in May 2007 they lost their listing on the Nasdaq

Propose Recommendation
Create internal controls
3rd party audits
Separation of roles to ensure the same person who makes the deals
Obtain security clearance for employees with access to funds…background checks, monitor accounts,
Electronic financial records

Summary
Effects of fraud to the company’s reputation
Cost involved in rebuilding a company reputation is costly
Importance of implementing strict security measures that will discourage employees to commit fraud
Tract employee activities improves accountability

a. SEC requires mandatory filings
b. NEC could not complete the filings due to employee fraud
ll. Problem at Hand
a. Fraud #1 – In 2006 a manager was found to have fabricated $311 million dollars in business deals
from 2002
i. Manager had access to all things necessary to falsify deals
ii. NEC did not provide separation of duties, audits, forced vacations
b. Fraud #2 – In 2006 10 employees engaged in fraudulent transactions for a total of $18 million
i. Employees gained $4.1 million in kickbacks
ii. Employees that created the false deals were the same that confirmed them

ill. Solution H rd _ _ g
a. NEC established an internal control system and confirmation IS carried out by a 3 party administrative
division

b. NEC could never catch up with SEC and in May 2007 they lost their listing on the NASDAQ

IV. Alternative Solutions

a. 3’“ party audits

b‘ Internal audits n who makes the deals

3fivififiaccess to funds (background checks, monitor accounts,

etc)

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