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BRIEF CONTENTS

SECTION 1 1.1

1.2

Comprehensive Cases ..................... *.................................................... • .................................... . ................................ " ................................. .

Jamaica Water .... vn,nOlrTl

Eddie, Inc.

1 ..................

3

1.3 • Enron Corporation _ .. _._1 __ ... _._ .. _ .• ___ . ___ ..•..•.. __ ._._ .... _ ..•.. _ .... __ .. _ ... ____ . ___ ... __ ....... __ .. _ ... _ ......•..• ___ ... _ .•.....• ____ ... _ .. _ ......... .

11 21 41 1 .4 \ .............~!~~~l~~?:y!~~??:~9~~?:~~?~~i?:~!on

1.5 Just for FEET, Inc. 1.6

1.7

1.8 The Leslie 1.9 Star Technologies, Inc.

SECTION 2 International Cases ............ "................ ....................... ............................................................................................ .. .......................................... .

2.1 Institute of Chartered Accountants of India ._------_. 2.2 Livent, Inc.

69 87

101 113 123

135 .........................................

137 149

.......................................................................... ......................... _................. . ........ , ........ ,._ ..... ..

2.3 Baan N.V 2.4 Ahold, N.V 2.5 Tata Finance Limited

....................................................... ~ .. -...... -...................... ~ .. --........... .... .

2.6 Kansayaku 2.7 OAO 2.8 Registered Auditors, South Africa 2.9 Australian Wheat Board

.......................... -.... . ................................. _ .......................................................... _ ..................................... _ ..... '''''''-'''- .................................... -. .. ............................ ~ .................... -

2.10 Zuan Yan ./

~:!~ ... __ ...~.(;l?~!.~(;l~.?~:~?:E~~~E?:~X .... m ••

SECTION 3 Ethical Responsibilities of Accountants .................. _ ........... _ .. _....... ... ................................................................................................................ .

3.1

3.2

3.3

3.4

3.5

Thomas Forehand, CPA Creve Couer Pizza, Inc.

........................ ~ .................. ~ .............. ~ .......................... - ......................................................... , ......... .

Jack Bass, Accounting Professor F&C International, Inc. David Quinn, Tax Accountant

-----

163 171

- ·187

195 205 219 231

.................. _ ................. .

241 253

257 ..............................

---.

259 265 269 275 279

3.6 --- Suzette Washingt~n, A<:~.ounting Maj9~_. ____ ._. __ ~~_

3.7

3.8

3.9

SECTION 4

.~ry~!.~rr~?:!!?~~~oun ti~~r.vtaj 0 r ..mm. .mm?~~ Oak Industries, Inc. 287 Wiley Jackson, Accounting Major

............................................. _ ................................................................................. ~................. ...... ............ , ............. .

Ethical Responsibilities of Independent Auditors

291

293 ............................................. .......................................... ................................................. .................. ...................................... . ............................................................. .

4.1 American Fuel & Supply Company, Inc. 295 4.2 Cardillo Travel Inc. 299

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BRIEF CONTENTS

4.3

4.4

4.5

4.6

Koger Properties, Inc. ............................................................ , ...... , ..... , .......................................... , ........................................... .

Mallon Resources NextCard, Inc.

...................................... - .................. __ ......................................................................... .

The North Face, Inc.

SECTION 5 ....... ~~~i!~!?!~i~~=~~~~~~~~~~!_~ 5.1 Rocky Mount Undergarment Company,. Inc. 5.2 Jack Inc. 5.3 Campbell Soup Company 5.4 Golden Inc.

~~ ______ S::BI Holding, Compan~.,_ I_n_c_. __ 5.6 Happiness Express, Inc. 5.7 SmarTalk Teleservices, Inc.

.... _. . ........................................ -.......... -.. --................................. .. ................................ ,,,.. . ............. _ ........ __ ................. .

5.8 CapitalBanc Corporation .................................................. , ................... _ ......................... _ ............ .

SECTION 6 Internal Control Issues 6.1 Stores 6.2 The Trolley Dodgers 6.3 Goodner Brothers, Inc.

........................................... -.............................. - ............................................. "............................ .. ........................... -........................................ .

6.4 . Howard Street Jewelers, Inc. 6.5 Triton Ltd. 6.6 Saks Fifth Avenue

SECTION 7 Professional Roles ..................................... ....... . .................................................... _ .................. _............................ ............................. . ............................ .

~~ ______ !i~m~lton W0n.~, In-Charge Accountant 7.2 Ann Walker, Staff Accountant 7.3

7.4

7.5

7.6

7.7

Cpades Tollison, Audit Manager Bill DeBurger, In-Charge Accountant

.................................................................................................................... _ ......................................... -.................................. _ ....... ..

Avis Love, Staff Accountant David WorldCom Controller Tommy O'Connell, Audit Senior

SECTION 8 Professional Issues ... -......... _ ............ _ ..... _.... .. ....................... --............ -.. -.-..... -.. -.. --.. , .. ~.~ ...... ~ .. ~.~.--......... -~ .. ~ ..... " .............. ~ ........ -........ '" ..... - .......... , .. ~ ....... -.... -... -.... -.-.~ ........ .

8.1 First Securities Company of Chicago & Emst v. Hochfelder et

305 309 315 325

333 335 339 347 355 363 369 377 381

385 387 395 397 405 409 419

423 425 429 431 435 439 443 449

453

455 8.2 PricewaterhouseCoopers Securities, LLC 461 --.------~---------.~---" --------------.--.. -----8.3 Fred Stem & Company, Inc.

CUltramares Corporation v. Touche et af.) 467 8.4 CPA 475 8.5

8.6

8.7

8.8

8.9

National Medical Transportation Network 479 Scott Fane, CPA 485

............................................ .................... . ................................. -.................................. . ........................................................................................................................................................... .

Bud Carriker, Audit Senior 491 v. Price Waterhouse 495

Sarah Russell, Staff Accountant 503

CONTENTS

SECTION 1 Comprehensive Cases 1

Case 1.1 Jamaica Water Properties 3 .......................... , ........... " ..... " ..... " ...

Shqrtly after accepting an executive position with JWp, David Sokol discovered several su$,icious items in the company's accounting records. Sokol insisted on thoroughly investigating those items. VVhen that investigation uncovered evidence of a pervasive fraud, Sokol resigned and turned over that evidence to the company's board of directors.

KEY TOPICS: ethical responsibilities of corporate management, control environment issues, and auditor independence.

Case 1.2 Crazy Eddie, Inc. 11

"Crazy Eddie"Antar oversaw a profitable chaireof consumer electronics stores on the East Coast during the 1970s and 1980s. After new owners discovered that the company's financial data had been grossly misrepresented, Antar fled the country, leaving behind thousands of angry stockholders and creditors.

KEY TOPICS: auditing inventory; inventory control activities, management integrity, the use of analytical procedures, and the hiring of former auditors by audit clients.

Case 1.3 Enron Corporation 21 ........................ " ..................... " .......... ..

Arthur Edward Andersen established a simple motto that he required his subordinates and clients to invoke: "Think straight, talk straight." For decades, that motto served Arthur Andersen & Co. well. Unfortunately, the firm's association with one client, Enron Corporation, abruptly ended Andersen's long and proud history in the public accounting profession.

KEY TOPICS: history of the public accounting profession in the United States, scope of professional services provided to audit clients, auditor independence, and retention of audit workpapers.

Case 1.4 Lincoln Savings and Loan Association 41

Charles Keating's use of creative accounting methods allowed him to manufacture huge paper profits for Lincoln.

KEY TOPICS: substance-over-form concept, detection of fraud, identification of key management assertions, collegial responsibilities of auditors, assessment of control risk, and auditor independence.

Case 1.5 Just for FEET, Inc. 55 In the fall of 1999, just a few months after reporting a record profit for fiscal 1998, Just for Feet collapsed and filed for bankruptcy. Subsequent investigations by law enforcement au(horities revealed a massive accounting fraud that had grossly misrepresented the company's reported operating results. Key features of the fraud were improper accounting for "vendor allowances" and intentional understatements of the company's inventory valuation allowance.

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KEY TOPICS: applying analytical procedures"identifying inherent risk and control risk factors, need for auditors to monitor key developments within the client's industry; assessing the health of a client's industry; and receivables confirmation procedures.

Case 1.6 Health Management, Inc . 69 ............... ,," ............................................. " ...................................... , ......................... ..

The Private Securities Litigation Reform Act (PSLRA) of 1995 amended the Securities " Exchange Act of 1934. This new federal statute was projected to have a major impact it on auditors' legal liability under the 1934 Act. The first major test of the PSLRA was

triggered by a class-action lawsuit filed against BDO Seidman for its 1995 audit of Health Management, Inc., a New York-based pharmaceuticals distributor.

KEY TOPICS: inventory audit procedures, auditor independence, audit workpapers, inherent risk factors, and auditors' civil liability under the federal securities laws.

Case 1.7 ZZZZ Best Inc. 87 Barry Minkow, the "boy wonder" o/Wall Street, created a $200,000,000 company that existed only on paper.

KEY TOPICS: identification of key management assertions, limitations of audit evidence, importance of candid predecessor-successor auditor communications, client confidentiality; and client-imposed audit scope limitations.

Case 1.8 The Leslie Fay Companies 101 H' ,. '"n,

In January 2002, Paul Polishan, the former chief financial officer of The Leslie Fay Companies, began serving a nine-year prison sentence for fraudulently misrepresenting Leslie Fay's financial statements in the early 1990s. Among the defendants in a large classaction lawsuit stemming from the fraud was the company's audit firm,BDO Seidman.

KEY TOPICS: applying analytical procedures, need for auditors to assess the health of a client's industry; identifying and assessing "red flags;' control environment issues, and auditor independence.

Case 1.9 Star Technologies, Inc. 113 This computer manufacturer found itself trapped in its industry's short product life cycle. The company incurred heavy R&D expenditures to develop new products, only to have those products soon become obsolete. Management began tampering with the company's accounting records to conceal its deteriorating financial condition..

KEY TOPICS: auditor-client conflict, conflict between auditors, audit review process, auditing inventory; auditing the allowance for bad debts, classification of liabilities, and intercompany transactions.

123 An SEC investigation revealed that officials of this company went to great lengths to conceal fraudulent misrepresentations in the company's accounting records from its independent auditors.

KEY TOPICS: the use of analytical procedures, accounting for revenue and capital expenditures, implications of the imbalance of power in the auditor-client relationship, and evaluation of conflicting audit evidence.

CONTENTS

SECTION 2 International Cases 135

Case 2.1 Institute of Chartered Accountants of India 137 ................................................................

The Institute of Chartered Accountants of India (ICAf) is the federal agency that oversees India's accounting profession. In 2002, the ICAI commissioned a study of the alleged takeover of that profession by the major international accounting firms. The restflting 900-page report charged that those firms had used a variety of illicit and even ille!1al methods to "colonize" India's market for accounting, auditing, and related services to the detriment of the nation's domestic accounting firms.

Case 2.2 Livent, Inc. 149

Garth Drabinsky built Livent, Inc., into a major force on Broadway during the 1990s. A string of successful Broadway productions resulted in numerous Tony Awards for the company. Despite Livent's theatrical success, the financial affairs of the Canadian company were in disarray. Drabinsky and severa(bf his top subordinates used a wide range of abusive accounting practices to conceal Livent's financial problems from their independent auditors.

Case 2.3 Baan Company, N.Y. 163 .....•..... " .. * ................. " ...................................................................... .

For the first time in its history, the Securities and Exchange Commission (SEC) sanctioned a foreign audit firm. Moret Ernst & Young Accountants, a Dutch affiliate- of Ernst & Young, was sanctioned for having a "joint business relationship" with Baan, a Dutch company with a large Us. subsidiary. This case also examines a similar situation involving Ernst & Young and one of its audit clients, PeopleSoft Corp0ration.

Case 2.4 Roya~~~()~?,~.y._. ___ ._ ............ _.__" 171 The Public Company Accou,nting Oversight Board (PCAOB) implied that this largescale accounting fraud involving the Netherlands' largest company demonstrated that foreign accounting and auditing regulatory bodies were failing to fulfill their oversight responsibilities. The PCAOB's insinuation prompted indignant responses from many of those organizations.

Case 2.5 Tata Finance Limited 187 A financial reporting fraud involving this large Indian company became known as "India's Enron." Company executives retained one of India's most prominent accounting firms to investigate the fraud. The report filed by that accounting firm implicated those same executives. Shortly after the report was released, the accounting firm retracted the report and fired the three partners responsible for it.

Case 2.6 Kansayaku 195 .. ...... . ...

Like the United States, Japan has recently made significant changes in the regulatory infrastructure for its financial reporting system. Many of these changes have directly impacted Japan's accounting profession and independent audit function. An accounting and auditing scandal involving a large cosmetics and apparel company, Kanebo Limited, posed the first major challenge of that new regulatory framework.

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Case 2.7 OAO Gazprom 205 Business Week referred to the huge Gazprom debacle as "Russia's Enron."For the first time in the history of the new Russian republic, a Big Four accounting firm faced a lawsuit for allegedly issuing improper audit opinions on a Russian company's financial statements.

Case 2.8 Registered Auditors, South Africa 219 The South African economy was rocked in recent years by a series of financial reporting scandals. To restore the credibility of the nation's capital markets, the South African Parliament passed a controversial new law, the Auditing Profession Act (APA). The APA established a new auditing regulatory agency and a new professional credential for independent auditors. The APA also mandated that independent auditors immediately disclose to the new auditing agency any "reportable irregularities" committed by an audit client.

Case 2.9 Australian Wheat Board 231 During the United Nations (UN) embargo imposed on Iraq following that nation's invasion of Kuwait, this large Australian company paid $300 million in bribes to secure lucrative Iraqi wheat contracts administered through the UN Oil-for-Food program. After the bribes were discovered in 2005 by a UN task force, two major international accounting firms became involved in the ensuing controversy

Case 2.10 Zuan Yan 241 The Big Four accounting firms view China as one of the most lucrative markets for accounting and auditing services worldwide. However; those firms face major challenges in that market. Among these challenges are an increasing litigation risk and the difficulty of coping with the often heavy-handed tactics of China's authoritarian central government.

Case 2.11 Kaset Thai Sugar Company 253 . .,.. ... ._,

This case focuses on the 1999 murder of Michael Wansley, a partner with Deloitte Touche Tohmatsu. Wansley was supervising a debt-restructuring engagement in a remote region of Thailand when he was gunned down by a professional assassin.

SECTION 3 Ethical Responsibilities of Accountants 257

Case 3.1 Thomas Forehand, ePA 259 A CPA in public practice faces a prison sentence after a dishonest client goads him into participating in a money-laundering scheme.

Case 3.2 Creve Couer Pizza, Inc. 265 Intrigue and espionage seem far removed from accounting ... but not in this case. Creve Couer's CPA was actually a double agent. While providing accounting services to his client, the CPA also supplied incriminating evidence regarding the client to the IR5.

CONTENTS

Case 3.3 Jack Bass, Accounting Professor 269 A cheating scandal at a large private university raises several ethical issues for an accounting professor.

Case 3.4 F&C International, Inc . 275 ............... MM········· .................................... MM .•.............

A fiJ;wncial fraud spelled the end of a company with a proud history and tested the , ethlifs of several of its key management and accounting personnel.

Case 3.5 David Quinn, Tax Accountant 279 The responsibility to maintain the confidentiality of client information obtained during a professional services engagement is at the center of a nasty disagreement that arises between two friends employed by a major accounting firm.

Case 3.6 Suzette Washington, Accounting Major 283 ...... ........... ............. "... . ................. " ................... ..... .............. ~ .

Suzette Washington was a college senior majoring in accounting when she came faceto-face with an important ethical decision. Since accounting majors are entering a profession with a rigorous code of ethics, do they have a greater responsibility than other students to behave ethically?

Case 3.7 Arvel Smart, Accounting Major 285

Should an accounting major accept an internship position with one firm when he or she has already decided to accept a job offer for a permanent position with another firm upon graduation?

Case 3.8 Oak Industries, Inc. 287 Top management of this company systematically misrepresented its operating results and financial condition. The !company 's controller often questioned his superiors' decisions before acting as a "good soldier" and following their instructions.

Case 3.9 Wiley Jackson, Accounting Major 291 . - . ~---- ..

"To tell or not to tell" was the gist of an ethical dilemma faced by Wiley lackson while completing a pre-employment document for his future employer, a major accounting firm.

SECTION 4 Ethical Responsibilities of Independent Auditors 293

Case 4.1 295

This case focuses on the responsibility of auditors to recall an audit report when they discover previously undetected errors in a client's audited financial statements.

Case 4.2 Cardillo Travel 299 A top executive of Cardillo pressured and manipulated three accountants, the company's controller and two partners of public accounting firms, in an unsuccessful attempt to conceal the true nature of a fraudulent entry in the company's accounting records.

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Case 4.3 Koger Properties, Inc. 305 "" .... , .. ,,,., ..... " ...

An audit partner's firm obtains a client in which he has a small but direct financial interest. The partner is then assigned to supervise the annual audit of that company. VVhat should he do?

Case 4.4 Mallon Resources Corporation 309 The common practice of auditors "changing sides" by accepting positions with clients raises several difficult-to-resolve issues for the public accounting profession. Many of these issues are posed by this case, which involves Mallon hiring one of its independent auditors for a key accounting position.

Case 4.5 NextCard, Inc. 315 In January 2005, Robert Trauger became the first partner of a major accounting firm to receive a prison sentence for violqting the criminal provisions of the Sarbanes-Oxley Act of 2002. ..

Case 4.6 The North Face, Inc . 325 ...............................................................

North Face's independent auditors altered prior-year workpapers to conceal questionable decisions made by an audit partner, decisions that involved several large barter transactions t!?at inflated the audit client's reported operating results.

SECTION 5 Audits of High-Risk Accounts 333

Case 5.1 Rocky Mount Undergarment Company, Inc. 335 "".. .. . ....

You are the accountant of a corporation experiencing severe financial problems. Top company officials suggest that several hundred employees will lose their jobs unless you embellish th'e company's financial data .. Three employees of Rocky Mount faced this unpleasant dilemma.

Case 5.2 Jack Greenberg, Inc. 339 A federal judge criticized Greenberg's independent auditors for failing to realize the impact that pervasive internal control problems had on the reliability of the company's inventory accounting records.

Case 5.3 Campbell Soup Company 347

On Wall Street, Campbell easily ranks among the "bluest" blue chip companies. Nevertheless, Camp bell and its audit firm were widely criticized when an investigation revealed that company executives had inflated the sales of its famous "red and white" product line by employing a variety of gimmicks.

Case 5.4 Golden Bear Golf, Inc. 355 Jack Nicklaus, the "Golden Bear," endured public embarrassment and large financial losses when key subordinates misapplied the percentage-ot-completion accounting method to numerous golf course development projects.

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CONTENTS

Case 5.5 CBI Holding Company, Inc. 363

This case focuses on audit procedures applied to accounts payable, including the search for unrecorded liabilities and the reconciliation of year-end vendor statements to recorded payables balances.

Ca~e 5.6 Happiness Express, Inc. 369 , ... ........ .. . ........... .

To ftcompensate for flagging sales of their Mighty Morphin Power Rangers toys, this company's executives booked millions of dollars of bogus sales. Deficiencies in the audit procedures applied by Happiness Express's auditors resulted in the bogus sales and receivables going undetected.

Case 5.7 SmarTalk Teleservices, Inc . 377 ...........................................

In recent years, "restructuring" reserves have been a controversial subject in the financial reporting domain. This case examines adxmnting and auditing issues stemming from a large restructuring reserve booked by SmarTalk.

Case 5.8 CapitalBanc Corporation 381 What is the most important asset of a bank? Cash, of course. This case examines an audit that failed to uncov.er a large embezzlement scheme perpetrated by a bank's chief executive officer.

SECTION 6 Internal Control Issues 385

Case 6.1 Stores 387 An important but common/ys overlooked internal control objective is ensuring "compliance with applicable laws and regulations." The management of this company violated the provisions of a federal statute, imposing a heavy monetary cost on the company in the process.

Case 6.2 The Trolley Dodgers 395 Control deficiencies in the Dodgers' payroll transaction cycle allowed an accounting manager to embezzle several hundred thousand dollars.

Case 6.3 Goodner Brothers, Inc. 397 An employee of this tire wholesaler found himself in serious financial trouble. To remedy this problem, the employee took advantage of his employer's weak internal controls by stealing a large amount of inventory, which he then sold to other parties.

Case 6.4 Howard Street Jewelers, Inc. 405 Given the susceptibility of cash to theft, retail companies typically establish rigorous internal controls for their cash processing functions. This case documents the high price of failing to implement such controls.

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Case 6.5 Triton Energy Ltd. 409 Executives ofTriton Energy violated the Foreign Corrupt PractiCes Act of 1977 (FCPA). In addition, to paying bribes to officials of foreign governments, company executives failed to comply with the FCPA's record-keeping and internal-control provisions.

Case 6.6 Saks Fifth Avenue 419 Saks' ''zero tolerance" policy for employee theft was tested in this case by a sales clerk. After being dismissed, the employee tested Saks again by suing the firm for wrongful termination.

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SECTION 7 Professional Roles 423

Case 7.1 Hamilton Wong, In-Charge Accountant 425 .. ,' ...... , ..

"Eating time," or underreporting time worked on audit engagements, has important implications for the quality of audit services and for the quality of auditors' work environment. Hamilton Wong came face-to-face with these issues when a colleague insisted on understating the hours she worked on her assignments.

Case 7.2 Leigh Ann Walker, Staff Accountant 429 A staff accountant employed by a large accounting firm is dismissed after serious questions arise regarding her integrity.

Case 7.3 Charles ToIIison, Audit 431 Audit managers occupy an important role in audit engagements and are a critical link in the employment hierarchy of public accounting firms.

Case 7.4 BilI DeBurger, In-Charge Accountant 435 .. ... ... . .......

To "sign off" or "not sign off" was the issue facing Bill DeBurger after he completed the audit procedures for a client's most important account. An angry confrontation with the audit engagement partner made Bill's decision even more difficult.

Case 7.5 Avis Love, Staff Accountant 439 Auditors sometimes develop close friendships with client personnel. Such friendships can prove problematic for auditors, as demonstrated in this case.

Case 7.6 David Myers, WorldCom Controller 443 This case provides a poignant chronological history of the WorldCom scandal from the perspective of David Myers, the company's former controller.

Case 7.7 Tommy O'Connell, Audit Senior 449 A new audit senior is quickly exposed to the challenging responsibilities of his professional work role when he is assigned to supervise a difficult audit engagement. During the audit, the senior must deal with the possibility that a staff accountant is not completing his assigned audit procedures.

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CONTENTS

SECTION 8 Professional Issues 453

Case 8.1 First Securities Company of Chicago & Ernst v. Hochfelder et 455

.............................. ,' .........•...........•..•......•............................... In this case, the Supreme Court defined the degree of auditor misconduct that must be pre~ent before a client can recover damages from an auditor in a lawsuit filed under thJ.Securities Exchange Act of 1934.

Case 8.2 Pricewater~ouseCoop~rs Securities, LLC 461 During the late 1990s, several international accounting firms developed investment banking practices. In fact, by 1998, two lof those firms, KPMG and PricewaterhouseCoopers (PwC), ranked first and second in the investment banking industry in terms of the number of M&A (merger and acquisition) transactions completed annually In 2002, the SEC sanctioned PwC for accepting cQntingent fee payments from several of its investment banking clients.

Case 8.3 Fred Stern & Company, Inc. (Ultramares Corporation v. Touche et al.) 467

- -. .- --

This 1931 legal case estafjlished the Ultramares Doctrine that decades later has a pervasive influence on auditors' civil liabilities under the common law.

Case 8.4 Stephen Gray, CPA 475 This sole practitioner challenged an ethical rule that banned CPAs from receiving commissions. Although he lost in court, the state board of accountancy later changed the controversial rule.

Case 8.5 National Medical Transportation Network 479 Under what circumstances does an accounting firm have a right and responsibility to withdraw from an audit engagement? After Deloitte resigned as MedTrans' independent auditor, the accounting firm was sued for not completing the audit that was in progress.

Case 8.6 Scott Fane, CPA 485 Scot[ Fane moved from New Jersey to Florida in hopes of establishing a successful accounting practice. Scot[ soon found that differing ethics rules for CPAs in the two states had important implications for his new firm.

Case 8.7 Bud Carriker, Audit Senior 491 An executive of an audit client informs the engagement partner that he is not "comfortable" working with the audit senior assigned to the engagement. Why? Because the audit senior is a member of a minority group. Will the partner assign another senior to the engagement?

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Case 8.8 Hopkins v. Price Waterhouse 495

This case explores the unique problems faced by women pursuing a career in public accounting.

Case 8.9 Sarah Russell, Staff Accountant 503 Sexual harassment is a sensitive subject that many companies and professional firms have been forced to contend with in recent years. This case recounts the experiences of a staff accountant who was harassed by an audit partner.

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INDEX

A A.E Ferguson & Company CAFp), 188 Accounting and Auditing Enforcement

Release No. 63, 287n Accounting and('Auditing Enforcement

Release\No. 93, 289n Accounting and Auditing Enforcement

Release No. 143, 299n Accounting and Auditing Enforcement



Release No. 458, 381 n, 382n Accounting and Auditing Enforcement



Release No. 861, 305n . Accounting and Auditing Enforcement


Release No. 1095, 154n, 156n Accounting and Auditing Enforcement










Release No. 1871, 319n, 320n Accounting and Auditing Enforcement


Release No.2124, 183n Accounting and Auditing Enforcement


Release No. 109A, 123n Accounting Research Bulletin

No 51, 29n Acosta, Fernando, 42-44 AFE see A. E Ferguson & Company

CAFP)

AICPA Code of Professional Conduct, Rule,462,476 .

Allen, Craig, 432 American Continental Corporation.

see Lincoln Savings and Loan Association

American Fuel & Supply Company, Inc., 295-297

American Medical Response, Inc. CAMR) , 481

AMR. see American Medical Response, Inc. CAMR)

Andersen, Arthur Edward, 21-23, 39 Andersen, Delany & Company, 21 Andersen, John, 21 Andersen, Mary, 21 , Andersen & Company,Arthur. see

Arthur Andersen & Company Anderson, Fletcher, 276-277 Antar, Eddie, 11-19 Antar, Sam E, 13, 18 Argy, Paul, 116, 120 Arthur Andersen & Company: audit of

audit of Australian Wheat Board, 231-239

audit of CapitalBanc, 381-383 audit of Enron, 27, 32-39 audit of Golden Bear Golf, Inc.,

355-361 audit of Leslie Fay Companies,

101-111 audit of Lincoln Savings and Loan

Association, 41-52 "audit of Oak Industries, Inc.,

287-290 Arthur Young & Company

audit of Lincoln Savings and Loan, 45-49

Atchison, Jack, 46-49 Audit clients

and auditor independence, 165, 167,168,198,306,313,463

and confidentiality, 50, 93-95, 226, 265-267

imbalance of power in relationship with auditor, 128

Auditors confidentiality rules, 225, 226,

265,280 due diligence, 152 imbalance of power with clients, 128 independence of, 165, 167, 168,

198, 306, 313, 463 as lobbyists, 142-144 ownership interest in client com

panies, 205-217 personal integrity, 9 promotion policies, 431-432

Audits confirmation procedures in,

. 183-185,300,370,451 implications of Ultramares

decision on,471-472 Australian Wheat Board, 231-239

B Baan Company,N.V, 163-169 Barden Corporation, 126-131 Bass, Jack, 269-273 BDO Seidman

audit of Health Management, Inc., 69-70,72-75

audit of Leslie Fay, 108-109 lawsuit against, 109 lawsuit against Leslie Fay, 109 tax shelters and, 265

Berardino, Joseph, 32-33, 38-39 Berardo, John, 426 Bergman, Drew, 69-70,73,74,75,77,

79,83 Bergman, Nancy, 73 Bertolini's, 283;;:284 Big Eight Firms, criticism of personnel

practices at, 495-498 Blackman,Alan, 123, 126 Bornstein, Fred, 75, 76, 77, 81 Boyle, Tom, 74, 75,82 Breeden, Richard, 39,47,49,70 Brieant, Charles, 421 Brokerage services, accepting

commissions in exchange for, 475-478

Brooklyn Dodgers. see Trolly Dodgers Buffett,Warren,9 Burke,William, 128, 129 Burnett, Jessica, 389

C CalEnergy, 3, 6, 9 Campbell Soup Company, 347-353 Campos, Edward, 395 CapitalBanc Corporation, 381-383 Capitalization

of legal expenditures, 125-126 of tooling costs, 128-131

Capital National Bank, 381 Cardillo Travel Systems, Inc., 299-303 Cardoza, Benjamin, 471 Carriker, Bud, 491-494 CBI Holding Company, Inc., 363-368 Checksfield, James, 266-267 Chevron Chemical Company, 295 Childers, Clark, 116-120 Cineplex Odeon, 150 Circon Corporation, 131-132

507

508

Class-action lawsuits, 38-39 against BOO Seidman, 69-72

Clinton, Bill, 233 Commissions, accepting, in exchange

for brokerage services, 475-478

Compagnie Francois des Petroles, 409 Confidentiality, 50, 93-95, 226,

265-267 Confidelhiality agreement, 95 Confirmation procedures, 183-185,

300,370,451 Conner, William C,8 Controlled informants, 265-267 Cook, Michael, 71 Cordova, Carlos, 381-383 Cornfeld, Bernie, 445 Crazy Eddie Inc., 11-19

accounting irregularities, 16 auditing irregularities, 16-17 collapse of, 11 formula for success of, 12-13 lawsuits against, 18-19 public offering of, 13-14

Creve Couer Pizza, Inc., 265-267 Curcio's Auto Supply, 397 Curcio's Tires, 403 Curtin, Thomas, 381, 383

D DeBurger, Bill, 435-437 Deceptive business practices, 352 Deloitte & Touche

audit of JWp, 6-7 audit of Lincoln Savings and Loan,

51-52/ audit of Livent, 149, 152-153, 155,-

156-158 audit of National Medical Trans

portation Network, 479-484 audit of Roger Properties, 305-306 lawsuit by National Medical Trans

portation Network, 482-484 (see also Deloitte, Haskins & Sells; Touche Ross)

Discrimination in workplace, 421-422 Dixon, Bruce, 129 Dodgers, Trolley, 395-396 Drabinsky,Garth,149-161 Due diligence, 152, 160,472 Duncan, David, 33, 38 du Pont, 22 Dwyer,Andrew, 3-5, 6-7 Dwyer, Martin, 4 Dynegy,32

E E.C.Garcia & Company, 43 Eckstein,Gordon, 155, 156, 159, 161 Eisner, Michael, 152

Embezzlement, 249, 254, 3QO-392, 405-406

Employee Polygraph Protection Act, 389,391-392

Employee theft, 389,419-422 Engagement letter, 91-92 Enron Corporation, 21-40

accounting at, 26-34 audit by Arthur Andersen, 27, 32,

33-39 history of, 24-25 SPEs, 28-32

Equity Funding Corporation of America, 335

Ernst & Ernst, First Securities case, 455-460

Ernst & Ernst v. Hochfelder et at, 457-460

Ernst & Whinnex audit of USSC,126-131 audit of ZZZZ Best, 90-94

Ernst & Young audit of JWP,7-9 audit of Lincoln Savings and Loan

Association, 41, 45-49, 51-52 audit of National Medical Trans

portation Network, 479-484 tax shelters marketed by, 265

Escrow syndicate, 455-456 Ethical responsibilities, 257-332

F

of accountants, 257-292 Arvel Smart,Accounting Major,

285-286 Creve Couer Pizza, Inc., 265-267 David Quinn,Tax Accountant,

279-282 F&C International, Inc., 275-278 Jack Bass,Accounting Professor,

269-273 Oak Industries, Inc., 287-290 Suzette Washington, Accounting

Major, 283-284 Thomas Forehand,CPA, 259-263 Wiley Jackson, Accounting

Major, 291-292 of independent auditors, 293-332

American Fuel & Supply Company, Inc., 295-297

Cardillo Travel Systems, Inc., 299-303

Koger Properties, Inc., 305-307 Mallon Resources Corporation,

309-314 NextCard, Inc., 315-323 North Face, Inc., The, 325-332

Fane, Scott, 485-489 Fastow;Andrew, 25, 27, 31, 32, 38 F&C International, Inc., 275-278

chief financial officer at, 277 chief operating officer at,

- 276-277 division controller at, 276 fraud at, 275-276

INDEX

SEC investigation of, 276, 277-278 Federal Home Loan Bank Board, 41 Fermi, Enrico, 456 Fierro, Joseph, 419-422 Financial Accounting Standards

Board, 23, 29, 377 Financial statements, 419-422 Financial statements, false and

misleading American Fuel & Supply, 295-296 Cardillo Travel Systems, 299-300 Crazy Eddie, Inc., 11 Enron,21 Health Management, Inc., 70-71 Rocky Mount Undergarment

Company, 337 USSC,123

First Securities Company of Chicago, 455-460

Fisk, Warren, 75 Florida Board of Accountancy, and

ban on direct solicitation by _accountants, 488-489

Forehand, Thomas, 259-263 Foreign Corrupt Practices Act, 233,

409,411-412,415,416 Fred Stern & Company, Inc., 467-473 Fries, Alex, 275 Fries, Jon, 275-278 Furman,Roy, 152, 153

G Garcia, Ernie, 43, 52 Garcia, Felix, 401-403 Gardner, Leroy, 98 Gladstone, William, 45-49, 50 Glen Culler & Associates, 116-118 Golden Bear Golf, Inc., 355-361 Gonzalez, Henry, 42 Goodbread, Michael, 305-306 Goodner, Ross, 397,399,402 Goodner Brothers, Inc., 397-404

Albert Hunt and, 397-398 inventory fraud at, 399-401 inventory shortage discovery by

internal auditors, 401-403 Woodrow "Woody" Robinson and,

398-399 Gottlieb, Myron, 149-152, 153, 157,

158,159 Gray, Larry, 93 Gray, Stephen, 475-478 Greenspan, Alan, 45 Greenspan, George, 89 Grendi, Ernest, 5, 6, 7, 8

INDEX 509

H Jacobson, Kirby, 387-388 Lieberman~:Joseph, 37 Jamaica Water Properties, 3-10 Lincoln Sayings and Loan

Hakes, Sam, 435-437 Deloitte & Touche audit, 6-7 Association, 41-53 Happiness Express, Inc., 369-376 Ernst & Young audit, 4, 5,7-9 abuses at, 42-45 Health Management, Inc. fraud at, 5 audit history of, 45-49 i

audit by BDO Seidman, 69-70, 72-75 history of, 4-'5 criticism of Arthur Young, 49-52 "

lawsuit against BDO Seidman, Johns, Gordon, 479-481 Linton, Walker, 431-432 80-85,109 Jurewicz, Paul, 77 Livent, Inc., 149-162

Hein, ClarencEf,-309-313 Just for FEET, Inc. Deloitte & Touche audit of, 153, Hein + Associittes Deloitte & Touche audit of, 63-66 156,157,160

audit of Malion Resources, fraud at, 58-63 fraud at, 153-156 309-313 history of, 55-57 history of, 149-152

High risk accounts, 333-383 KPMG audit of, 152-153, 161 Campbell Soup Company, 347-353 K Lone Star Gas Corporation, 23 CapitaiBanc Corporation, 381-383

Kansayaku, 195~203 Los Angeles Dodgers, and payroll CBI Holding Company, Inc., fraud, 395

363-368 Karnick, JilI, 81-82 Love, Avis, 439-441 Golden Bear Golf, Inc., 355-361 Kaset Thai Sugar Company, 253-256 Lowell, Inc., 439-441 Happiness Express, Inc., 369-376 Kaye, Paula, 283-299 Lukenda, James, 381-383 Jack Greenberg, Inc., 339-346 Kaye, WilIiam, 301 Lyle, Dan, 96 RMUC,335-337 Keating, Charles, Ill, 44, 52

SmarTalk Teleservices, Inc., Keating, Charles, Jr., 41-49, 52 M

377-380 Kenia, Donald, 101-102, 104-111

Hirsch,Leon, 123, 131-132 Kennedy, Anthony, 487-488 Mail rule, in First Securities case, 457 Homecare Management, 72 Kenneth Leventhal & Company, 42, 50 Main Hurdman, audit of Crazy Eddie, Hope, Michael, 129, 131 KMG Main Hurdman, audit of 16-17.See also KMG Main Hopkins, Ann, 495-501 Cardillo Travel Systems, 301. Hurdman Hopkins u. Price Waterhouse, 495-502 See also Main Hurdman Mallon, Georgf, 30~-313 Hotte, Clifford, 69-70, 72-75, 77, 78 Knight, Duane, 309-312 Mallon Resources Corporation, Houston Natural Gas Company, 24 Koger Properties, Inc., 305-307 309-313 Howard Street Jewelers, Inc. KPMG.See also KPMG Peat Marwick Marcelle Stores, 435-437

embezzlement and,405-407 audit of Livent, 152-153 McCain,John,45 Hutchinson, Lauren, 425-427 tax shelters and,265 MedTrans, 479-484

8-K statements, filing of Messina, Maria, 149-162 I Cardillo Travel Services, 300-301 Metcalf, Lee, and investigation of

by ZZZZ Best, 95 personnel practices at public Ibanez, Silvia, 488 accounting firms, 496, 497 Independence, auditors, 165, 167, 168, LJ

Minkow; Barry, 87-100 198,306,313,463

Lacey Manufacturing Company, More, Robert;372 Influence peddling, 42-45

128-130 Morrison, Jack, 449, 451-452 Institute of Chartered Accountants of

Laidlaw Medical Transportation, Moyer, Norman, 456 India, 137-148 Murdoch, Rupert, 395

Internal control issues, 385-422 Inc., 482

Goodner Brothers, Inc., 397-404 Lawrence, Esther, 299 Myers, David, 443-447

Howard Street Jewelers, Inc., Lay, Kenneth, 24-27, 30,32, 37-38 N 405-407 Leach, Jim, 41,50-51

Saks Fifth Avenue, 419-422 Lee, Bill, 409-411 National Medical Transportation Triton Energy Ltd., 409-417 Leslie Fay Companies, the, 101-111 Network, 479-484 Troberg Stores, 387-393 BDO Seidman audit of, 107 Nay, LadisIas, 455-457 Trolley Dodgers, The, 395-396 fraud at, 104-108 Neary, Robert, 129

Internal Revenue Service history of, 102-103 Negligence of auditors, 455-460, controlled informants and, industry decline, 104-108 467-473,479-484

265-267 lawsuit against BDO Seidman, NextCard, Inc., 315-323 Internorth, Inc., 24 108-109 Niven,John 8.,468 Inventory obsolescence reserve Leventhal & Company, Kenneth, 42, 50 Northern Natural Gas Company,

understatement of, 288-289 Levi,Alvin,405-406 23-24 Ito, Lance, 52 Levi, Julius, 405-406

Levi, Lore, 405-406 0 J Levitt,Arthur, 34, 377

Liability Oak Industries Inc., 287-290 Jack Greenberg, Inc., 339-346 to third-party financial statement reserves at, 287-288 Jackson, Wiley, 291-292 users, 467-473 SEC investigation of, 288-289

510

OAO Gazprom, 205-218 Obsolete inventory, 131 O'Connell, Tommy; 449--452 O'Connor, Sandra, 488--489 Ogden Projects, Inc., 3 O'Malley; Waiter, 395 Ontario Securities Commission,

153-156,158 Ovitz, Mic{ael, 152, 160 Ownership interest in client

companies by auditors, 305-307

p

Padgett, Tom, 88-89, 94, 98 Partner selection policies at Price

Waterhouse, 500 Paulsen, Elliot, 387-392 Payroll fraud, 221,396 3 percent rule, 29 Perley; Robert, 419--422 Personnel practices, criticism of, at

Big Eight firms, 495--498 Pertamina, 412--414 Polishan,Paul,101-111 Polygraph tests, 389-390 Pomerantz, Fred, 101-103 Pomerantz,John, 101-110 Powers, William C,30 Powers Report, 30, 34-36 Price Waterhouse.See also

PricewaterhouseCoopers audit of Star Technologies, 113-116 lawsuit by Ann Hopkins, and,

495-501 partner selection policies at, 498--499 ZZZZ Best fraud, and, 96

PricewaterhouseCoopers. See also Price Waterhouse

censure by SEC, 461--463 Private Securities Litigation Reform

Act,69-71,160,350 Professional issues for auditors

assignment of inexperienced auditors, 435--437

friendship with clients, 439--441 independence, 305-306 personal integrity; 429--430 promotion policies, 431--432 reporting time worked, 425--427 sexual discrimination, 495-500 sexual harassment,419--422 withdrawal from audit

engagement, 479--484 Promotion policies in public

accounting firms, 431--432

Q Quinn, David, 279-282

R Rahal,Violet, 387-392 Rampell, Richard, 488 Rappele, Mo, 439--440 Registered Auditors, South Africa,

219-229 Repurchase (repo) transactions,

127-128 Reserves at Oak Industries,287-288 Resolution Trust Corporation, 45 Restatement of Torts, 472 Riley; Raymond, 299, 301-302 Roberts, Don, 429--430 Robinson, Woodrow 'Woody,' 397--403 Rocky Mount Undergarment

Company; Inc., 335-337 Rognlien, A. Walter, 299-301 Royal Ahold, N.V, 171-186 Ruffman, Donna, 419 Rule 10b-5,of Securities Exchange

Act of 1934,70,83,302, 457--460

Rule 503 of the AICPA Code of Professional Conduct, 475--476,478

Russell, Sarah, 503-505 Ruttenberg, Harold, 55-64 Ryan-Nichols & Company; 455

s Saint Andrew's Hospital, audit of,

429--430 Saks Fifth Avenue, 419--422

employee lawsuit against, 420--422 employee pilfering, 419--420

Schilit, Howard, 108 Schueren,Arnold,455--456 Schuster, Craig, 277 Securities Act of 1933,472 Securities and Exchange Commis-

sion (SEC) censure of Pricewaterhouse

Coopers, 461--463 consent decree with Charles

Keating,44 criticism of ArthurYoung's audit of

Lincoln Savings and Loan, 49-51

Deloitte & Touche's audit of Koger Properties, 306

Ernst & Whinney's audit of USSC, 125-128

Hein + Associates' audit of Mallon Resources, 309-313

investigation of Arthur Andersen's CapitalBanc audit, 381-383

investigation of Arthur Andersen's Waste Management Inc. audit,36

INDEX

investigation of Cardillo Travel . Systems, 301

investigation of Crazy Eddie, 11, 16,18

investigation of F&C International Inc.,276-278 '

investigation of Health Management, Inc., 69

investigation of Jamaica Water Properties, 5-8, 153-156, 161

investigation of Oak Industries, 288-289

investigation of Rocky Mount Undergarment Company; 335-336

investigation of Star Technologies, 116,118,119

investigation of Triton Energy; 409, 414--415

investigation of USSC, 123, 125-128 ZZZZ Best fraud, 87, 96

Securities Exchange Act of 1934, 69,199

Rule lOb-5, and, 70, 83, 457 Sexual discrimination, and

promotion policies at public accounting firms, 495-501

Sexual hara&iment, 419--422 SFX Entertainment, 160 Shamblin, Clay; 440 Sharp, Philip, 482, 483--484

. Shepherd, Helen, 300-303 Shlonsky; Roger, 301-302 Siouffi, Roland, 410, 414--415 SkiIling, Jeffrey; 24-26, 28, 30, 31,

32,38 Smart, Arvel Ray; 285-286 SmarTalk Teleservices, Inc., 377-380 Smith, Russell, 299 Sokol, David, 3-9 Spacek, Leonard, 23, 32, 34 Spatt, Arthur, 78, 83 Special purpose entities (SPE),

29-32 Sprauer, Catherine, 276-277 Star Technologies, Inc., 113-121

collapse of, 113-116 Price Waterhouse's audit of,

116-120 Stillman, Charles, 109 Strauss, Norman, 129 Stretchlon Industries, Inc., 336 Sun, Angela, 425--427

T Tata, Jamsetjji Nusserwanji, 187 Tata Finance Limited, 187-188 The North Face, Inc., 325-332 Third-party financial statement

users, 472

INDEX .511

ToIlison, Charles, 431-433 U Webster, B.obert, 152-153 \\

Tooling costs, disagreement Wescon, 43,_ 44 regarding capitalization of, Ultramares Corporation v. Touche Wiley; L.R., 409 128-131 et aI., 467-473 William Blair & Company; 480, 481

Topol, Robert, 155, 157 United Airlines, and Cardillo Travel Wilmeth, Carl, 450 Touche, George Alexander, 468 Systems, 299-302 Wilson, K. T, 492, 493 Touche, Niven & Company United Slates v.ArthurYoung & Co., 477 Women

audit of Fred Stem & Company; United States Surgical Corporation, sexual discrimination in 467-46r3 123-133 promotion policies at public

and lawsuit ~y Ultramares, abusive accounting practices at, accounting firms, 495-501 468-471 125-126 sexual harassment, 419-422

Touche Ross & Company. See also allegations of audit deficiencies at, Wong, Hamilton, 425-427 Deloitte & Touche; Touche, 126-128 WorldCom, 27, 443-445 Niven & Company disagreement with Ernst & Whinney

audit of American Fuel & Supply; regarding capitalization of y 295-296 tooling costs, 128-131

audit of Cardillo Travel Systems, V

Yamont, Paul, 128-130 300-301 Young, Michael, 70, 79,80,83

audit of Crazy Eddie, 16-17 Vaughn, Jackie, 429-43Q. Young & Company; Arthur. See Arthur audit of Lincoln Savings and Velotti,Angelo, 387-392 Young & Company

Loan,49 Vincent, Janice, 48-49 Triton Energy Ltd., 409-417 Z history of, 409-411 W Indonesian charges against, Zuan Yan, 241-251

412-413 Wagner,James, 295-296 Zweriing, Jeffrey; 84 SEC investigation of,414-416 Walker, Leigh Ann, 429-430 ZZZZ Best Company; Inc.

Troberg Stores, 387-392 .Wansle, Michael, 253-256 collapse of,96-98 Trolley Dodgers, the, 395-396 Washington, Suzette, 283-284 early histOljwf, 88-89 Tsai,Mei-ya, 73, 75, 77,80,81,82 Waste Management Inc., 36 public offering of,89-90 Turner, Lynn, 36 Watchdogs vs. bloodhounds, 138-139 retention of Ernst & Whinney; Tyco International Ltd., 132 Watkins, Sherron, 27, 30, 32, 33 90-94

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