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Contemporary auditing real issues


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AUDITING

CONTEMPORARY
REAL ISSUES & CASES
R

MICHAEL C. KNAPP


EIGHTH EDITION

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Section 1: Comprehensive Cases

Section 3: Internal Control Issues




























1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10
1.11
1.12
1.13
1.14
1.15
1.16
1.17
1.18

Enron Corporation
Just for FEET, Inc.
Jamaica Water Properties
Health Management, Inc.
The Leslie Fay Companies
NextCard, Inc.
Lincoln Savings and Loan Association
Crazy Eddie, Inc.
ZZZZ Best Company, Inc.
Gemstar-TV Guide International, Inc.
New Century Financial Corporation
Madoff Securities
General Technologies Group, Ltd.*
AMRE*
Star Technologies*
United States Surgical Corporation*
The Fund of Funds, Ltd.*
ESM Government Securities, Inc.*

Section 2: Audits of High-Risk Accounts















2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
2.13
2.14

Jack Greenberg, Inc.
Golden Bear Golf, Inc.
Happiness Express, Inc.
CapitalBanc Corporation
Dollar General Stores, Inc.
CBI Holding Company, Inc.
Campbell Soup Company
Doughtie’s Foods, Inc.*
Flight Transportation Corporation*
J.B. Hanaue & Co.*
Giant Stores Corporation*
Perry Drug Stores*
SmarTalk Teleservices*
Rocky Mount Undergarment Company, Inc.*

3.1
3.2
3.3
3.4
3.5
3.6
3.7

The Trolley Dodgers
Howard Street Jewelers, Inc.
United Way of America
Triton Energy Ltd.
Goodner Brothers, Inc.
Troberg Stores
Saks Fifth Ave.*

Section 4: Ethical Responsibilities of Accountants











4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10

Creve Couer Pizza, Inc.
F&C International, Inc.
Suzette Washington, Accounting Major
Thomas Forehand, CPA
Wiley Jackson, Accounting Major
Arvel Smart, Accounting Major
David Quinn, Tax Accountant
Laurel Valley Estates*
Oak Industries, Inc.*
Jack Bass, Accounting Professor*

Section 5: Ethical Responsibilities
of Independent Auditors










5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9

Cardillo Travel Systems, Inc.
American International Group, Inc.
The North Face, Inc.
Waverly Holland, Audit Senior
Koger Properties, Inc.
American Fuel & Supply Company, Inc.
PTL Club*
Zaveral Boosalis*
Mallon Resources Corporation*

continued on back side


Section 6: Professional Roles

Section 8: International Cases


























6.1
6.2
6.3
6.4
6.5
6.6
6.7

Leigh Ann Walker, Staff Accountant
Bill DeBurger, In-Charge Accountant
David Myers, WorldCom Controller
Tommy O’Connell, Audit Senior
Avis Love, Staff Accountant
Charles Tollison, Audit Manager
Hamilton Wong, In-Charge Accountant

Section 7: Professional Issues

8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9
8.10
8.11
8.12
8.13
8.14
8.15
8.16

Livent, Inc.
Royal Ahold, N.V.
Kansayaku
Registered Auditors, South Africa
Zuan Yan
Kaset Thai Sugar Company
Australian Wheat Board
OAO Gazprom
Tata Finance Limited
Institute of Chartered Accountants of India
Societe Generale
Shari’a
Republic of the Sudan
Mohamed Salem El-Hadad, Internal Auditor
Tae Kwang Vina
Baan Company N.V.*

















7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
7.10
7.11
7.12
7.13
7.14
7.15

2

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Ligand Pharmaceuticals
Stephen Gray, CPA
Scott Fane, CPA
Hopkins v. Price Waterhouse
Sarah Russell, Staff Accountant
Bud Carriker, Audit Senior
Fred Stern & Company, Inc. (Ultramares)
First Securities Company of Chicago (Hochfelder)
CPA2Biz.com*
Texas Drug Warehouse*
Taxing Transactions*
Stock Option Mania*
HealthSouth Corporation*
PricewaterhouseCoopers Securities*
National Medical Transportation*

* Cases drawn from previous editions of Knapp’s
Contemporary Auditing that are not available
in the 8th edition.

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CONTEMPORARY AUDITING
REAL ISSUES

AND

Eighth Edition

CASES


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CONTEMPORARY AUDITING
REAL ISSUES

AND

CASES

Eighth Edition

Michael C. Knapp
University of Oklahoma

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Contemporary Auditing: Real Issues and
Cases, Eighth Edition
Michael C. Knapp
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DEDICATION

To my parents
William Jackson Knapp and
Orebel DeBurger Knapp


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BRIEF CONTENTS
SECTION

1

Comprehensive Cases
Enron Corporation
Just for FEET, Inc.
Jamaica Water Properties
Health Management, Inc.
The Leslie Fay Companies
NextCard, Inc.
Lincoln Savings and Loan Association
Crazy Eddie, Inc.
ZZZZ Best Company, Inc.
Gemstar-TV Guide International, Inc.
New Century Financial Corporation
Madoff Securities

2

Audits of High-Risk Accounts
Jack Greenberg, Inc.
Golden Bear Golf, Inc.
Happiness Express, Inc.
CapitalBanc Corporation
Dollar General Stores, Inc.
CBI Holding Company, Inc.
Campbell Soup Company

163
165
173
181
189
193
197
203

3

Internal Control Issues
The Trolley Dodgers
Howard Street Jewelers, Inc.
United Way of America
Triton Energy Ltd.
Goodner Brothers, Inc.
Troberg Stores

211
213
215
217
223
233
241

4

Ethical Responsibilities of Accountants
Creve Couer Pizza, Inc.
F&C International, Inc.
Suzette Washington, Accounting Major
Thomas Forehand, CPA
Wiley Jackson, Accounting Major
Arvel Smart, Accounting Major
David Quinn, Tax Accountant

247
249
253
257
259
265
267
269

1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10
1.11
1.12
SECTION

2.1
2.2
2.3
2.4
2.5
2.6
2.7
SECTION

3.1
3.2
3.3
3.4
3.5
3.6
SECTION

4.1
4.2
4.3
4.4
4.5
4.6
4.7

1
3
23
37
45
63
75
85
99
109
123
135
153

vii


viii

BRIEF CONTENTS

SECTION

5

Ethical Responsibilities of
Independent Auditors
Cardillo Travel Systems, Inc.
American International Group, Inc.
The North Face, Inc.
Waverly Holland, Audit Senior
Koger Properties, Inc.
American Fuel & Supply Company, Inc.

273
275
281
285
293
299
303

6

Professional Roles
Leigh Ann Walker, Staff Accountant
Bill DeBurger, In-Charge Accountant
David Myers, WorldCom Controller
Tommy O’Connell, Audit Senior
Avis Love, Staff Accountant
Charles Tollison, Audit Manager
Hamilton Wong, In-Charge Accountant

307
309
311
315
321
325
329
333

7

Professional Issues
Ligand Pharmaceuticals
Stephen Gray, CPA
Scott Fane, CPA
Hopkins v. Price Waterhouse
Sarah Russell, Staff Accountant
Bud Carriker, Audit Senior
Fred Stern & Company, Inc.
(Ultramares Corporation v. Touche et al.)
First Securities Company of Chicago
(Ernst & Ernst v. Hochfelder et al.)

337
339
345
349
355
363
367

International Cases
Livent, Inc.
Royal Ahold, N.V.
Kansayaku
Registered Auditors, South Africa
Zuan Yan
Kaset Thai Sugar Company
Australian Wheat Board
OAO Gazprom
Tata Finance Limited
Institute of Chartered Accountants of India

387
389
403
419
429
441
453
457
467
481
489

5.1
5.2
5.3
5.4
5.5
5.6
SECTION

6.1
6.2
6.3
6.4
6.5
6.6
6.7
SECTION

7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8

SECTION

8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9
8.10

8

373
381


BRIEF CONTENTS

8.11
8.12
8.13
8.14
8.15

Societe Generale
Shari’a
Republic of the Sudan
Mohamed Salem El-Hadad, Internal Auditor
Tae Kwang Vina

501
517
527
533
539

ix


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CONTENTS
SECTION

1

Case 1.1

Comprehensive Cases

1

Enron Corporation

3

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.
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.
KEY TOPICS:

Case 1.2

Just for FEET, Inc.

23

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 authorities 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.
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.
KEY TOPICS:

Case 1.3

Jamaica Water Properties

37

Shortly after accepting an executive position with JWP, David Sokol discovered
several suspicious items in the company’s accounting records. Sokol insisted on thoroughly investigating those items. When that investigation uncovered evidence of a
pervasive fraud, Sokol resigned and turned over that evidence to the company’s board
of directors.
ethical responsibilities of corporate management, control environment
issues, and auditor independence.
KEY TOPICS:

Case 1.4

Health Management, Inc.

45

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

xi


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xii

CONTENTS
Case 1.5

The Leslie Fay Companies

63

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 class-action
lawsuit stemming from the fraud was the company’s audit firm, BDO Seidman.
applying analytical procedures, need for auditors to assess the health of
a client’s industry, identifying fraud risk factors, control environment issues, and
auditor independence.
KEY TOPICS:

Case 1.6

NextCard, Inc.

75

In January 2005, Robert Trauger became the first partner of a major accounting firm
to be sent to prison for violating the criminal provisions of the Sarbanes-Oxley Act of
2002.
identifying fraud risk factors, nature and purpose of audit workpapers,
understanding a client’s business model, criminal liability of auditors under
Sarbanes-Oxley Act, and collegial responsibilities of auditors.
KEY TOPICS:

Case 1.7

Lincoln Savings and Loan Association

85

Charles Keating’s use of creative accounting methods allowed him to manufacture
huge paper profits for Lincoln.
substance-over-form concept, detection of fraud, identification of key
management assertions, collegial responsibilities of auditors, assessment of control
risk, and auditor independence.
KEY TOPICS:

Case 1.8

Crazy Eddie, Inc.

99

“Crazy Eddie” Antar oversaw a profitable chain of 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.
auditing inventory, inventory control activities, management integrity,
the use of analytical procedures, and the hiring of former auditors by audit clients.
KEY TOPICS:

Case 1.9

ZZZZ Best Company, Inc.

109

Barry Minkow, the “boy wonder” of Wall Street, created a $200,000,000 company that
existed only on paper.
identification of key management assertions, limitations of audit
evidence, importance of candid predecessor-successor auditor communications,
client confidentiality, and client-imposed audit scope limitations.
KEY TOPICS:

Case 1.10

Gemstar-TV Guide International, Inc.

123

In 2000, U.S. News and World Report predicted that Henry Yuen, the chief executive
of Gemstar-TV Guide International, would become the “Bill Gates of television” thanks
to the innovative business model that he had developed for his company. When that


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CONTENTS

business model proved to be a “bust,” Yuen used several accounting gimmicks to
embellish his company’s reported operating results.
conditions commonly associated with “audit failures,” revenue recognition principle, quantitative and qualitative materiality assessments, and “legal” vs.
“ethical” conduct.
KEY TOPICS:

Case 1.11

New Century Financial Corporation

135

The collapse of New Century Financial Corporation in April 2007 signaled the beginning of the subprime mortgage crisis in the United States, a crisis that would destabilize securities and credit markets around the globe. A federal bankruptcy examiner
has maintained that New Century’s independent audits were inadequate.
auditing loan loss reserves, Section 404 audit procedures, material internal control weaknesses, auditor independence, and audit staffing issues.
KEY TOPICS:

Case 1.12

Madoff Securities

153

As an adolescent, Bernie Madoff dreamed of becoming a “key player” on Wall Street.
Madoff realized his dream by overseeing the world’s largest and possibly longest running Ponzi scheme. Madoff’s auditor pleaded guilty to several criminal charges for his
role in that fraud.
factors common to financial frauds, regulatory role of Securities and
Exchange Commission (SEC), nature and purpose of peer reviews, appropriate audit
procedures for client investments, and the importance of the independent audit
function.
KEY TOPICS:

SECTION

2

Case 2.1

Audits of High-Risk Accounts

163

Jack Greenberg, Inc.

165

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 2.2

Golden Bear Golf, Inc.

173

Jack Nicklaus, the “Golden Bear,” endured public embarrassment and large financial
losses when key subordinates misapplied the percentage-of-completion accounting
method to numerous golf course development projects.

Case 2.3

Happiness Express, Inc.

181

To compensate 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.

xiii


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xiv

CONTENTS

Case 2.4

CapitalBanc Corporation

189

What is the most important asset of a bank? Cash, of course. This case examines an
audit that failed to uncover a large embezzlement scheme perpetrated by a bank’s
chief executive officer.
Case 2.5

Dollar General Stores, Inc.

193

An IBM employee came up with a creative solution to an “accounting problem” that
was impeding a major purchase of IBM equipment by Dollar General. That solution
resulted in both companies being sanctioned by the SEC.
Case 2.6

CBI Holding Company, Inc.

197

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.
Case 2.7

Campbell Soup Company

203

On Wall Street, Campbell easily ranks among the “bluest” blue chip companies.
Nevertheless, Campbell 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.

SECTION

3

Case 3.1

Internal Control Issues

211

The Trolley Dodgers

213

Control deficiencies in the Dodgers’ payroll transaction cycle allowed an accounting
manager to embezzle several hundred thousand dollars.
Case 3.2

Howard Street Jewelers, Inc.

215

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.
Case 3.3

United Way of America

217

Weak or nonexistent internal controls have resulted in this prominent charitable organization, as well as numerous other charities nationwide, being victimized by opportunistic employees.
Case 3.4

Triton Energy Ltd.

223

Executives of Triton 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.


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CONTENTS

Case 3.5

Goodner Brothers, Inc.

233

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 3.6

Troberg Stores

241

An important but commonly 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.

SECTION

4

Case 4.1

Ethical Responsibilities of Accountants

247

Creve Couer Pizza, Inc.

249

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 IRS.
Case 4.2

F&C International, Inc.

253

A financial fraud spelled the end of a company with a proud history and tested the
ethics of several of its key management and accounting personnel.
Case 4.3

Suzette Washington, Accounting Major

257

Suzette Washington was a college senior majoring in accounting when she came
face-to-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 4.4

Thomas Forehand, CPA

259

A CPA in public practice faces a prison sentence after a dishonest client goads him
into participating in a money-laundering scheme.
Case 4.5

Wiley Jackson, Accounting Major

265

“To tell or not to tell” was the gist of an ethical dilemma faced by Wiley Jackson while
completing a pre-employment document for his future employer, a major accounting
firm.
Case 4.6

Arvel Smart, Accounting Major

267

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

xv


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xvi

CONTENTS

Case 4.7

David Quinn, Tax Accountant

269

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.
SECTION

5 Ethical Responsibilities of Independent Auditors

Case 5.1

Cardillo Travel Systems, Inc.

273
275

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.
Case 5.2

American International Group, Inc.

281

AIG is best known as the company that received more federal “bailout” funds than
any other following the economic crisis that engulfed the U.S. economy in the fall of
2008. Several years earlier, AIG had been widely criticized for marketing customized
special purpose entities (SPEs). Surprisingly, Ernst & Young helped AIG develop and
market this controversial service.
Case 5.3

The North Face, Inc.

285

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 that inflated the company’s reported operating results.
Case 5.4

Waverly Holland, Audit Senior

293

A few months after leaving public accounting, “Dutch” Holland is pressured to become
involved in a class-action lawsuit involving a former audit client of his. If he cooperates
with the plaintiff attorneys, he will alienate his former colleagues. If he doesn’t cooperate, he may be named as a defendant in that lawsuit. What will Dutch choose to do?
Case 5.5

Koger Properties, Inc.

299

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.
What should he do?
Case 5.6

American Fuel & Supply Company, Inc.

303

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.

SECTION

6

Case 6.1

Professional Roles

307

Leigh Ann Walker, Staff Accountant

309

A staff accountant employed by a large accounting firm is dismissed after serious
questions arise regarding her integrity.


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CONTENTS

Case 6.2

Bill DeBurger, In-Charge Accountant

311

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 6.3

David Myers, WorldCom Controller

315

This case provides a poignant chronological history of the WorldCom scandal from
the perspective of David Myers, the company’s former controller.
Case 6.4

Tommy O’Connell, Audit Senior

321

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.
Case 6.5

Avis Love, Staff Accountant

325

Auditors sometimes develop close friendships with client personnel. Such friendships
can prove problematic for auditors, as demonstrated in this case.
Case 6.6

Charles Tollison, Audit Manager

329

Audit managers occupy an important role on audit engagements and are a critical
link in the employment hierarchy of public accounting firms.
Case 6.7

Hamilton Wong, In-Charge Accountant

333

“Eating time,” or underreporting time worked on audit engagements, has serious 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.
SECTION

7

Case 7.1

Professional Issues

337

Ligand Pharmaceuticals

339

Ligand’s auditor was the first Big Four firm sanctioned by the Public Company
Accounting Oversight Board (PCAOB).
Case 7.2

Stephen Gray, CPA

345

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 7.3

Scott Fane, CPA

349

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

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xviii

CONTENTS

Case 7.4

Hopkins v. Price Waterhouse

355

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

Case 7.5

Sarah Russell, Staff Accountant

363

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.

Case 7.6

Bud Carriker, Audit Senior

367

An executive of an audit client informs the audit partner that he is not “comfortable”
working with the senior assigned to the engagement. Why? Because the senior is
a member of a minority group. Will the partner assign another senior to the
engagement?

Case 7.7

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

373

This 1931 legal case established the Ultramares Doctrine that decades later has a pervasive influence on auditors’ civil liability under the common law.

Case 7.8

First Securities Company of Chicago
(Ernst & Ernst v. Hochfelder et al.)

381

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

SECTION

8

Case 8.1

International Cases

387

Livent, Inc.

389

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 Canadian company. Despite Livent’s theatrical success, its financial
affairs were in disarray. Drabinsky and several of his top subordinates used abusive accounting practices to conceal Livent’s financial problems from their independent auditors.

Case 8.2

Royal Ahold, N.V.

403

The Public Company Accounting Oversight Board (PCAOB) suggested that the 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.


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CONTENTS

Case 8.3

Kansayaku

419

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.
Case 8.4

Registered Auditors, South Africa

429

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 8.5

Zuan Yan

441

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 8.6

Kaset Thai Sugar Company

453

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.
Case 8.7

Australian Wheat Board

457

During the United Nations (U.N.) 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 U.N. Oil-for-Food program.
After the bribes were discovered in 2005 by a U.N. task force, two major international
accounting firms became involved in the ensuing controversy.
Case 8.8

OAO Gazprom

467

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 8.9

Tata Finance Limited

481

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

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xx

CONTENTS

those same executives. Shortly after the report was released, the accounting firm retracted the report and fired the three partners responsible for it.
Case 8.10

Institute of Chartered Accountants of India

489

The Institute of Chartered Accountants of India (ICAI) 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 resulting 900-page report charged that those firms had used a variety of illicit and
even illegal methods to “colonize” India’s market for accounting, auditing, and related
services to the detriment of the nation’s domestic accounting firms.
Case 8.11

Societe Generale

501

This case addresses the surprising decision made by Societe Generale, France’s second largest bank, to backdate a 6.4 billion euro loss that resulted from unauthorized
securities trades made by one of its employees. Although that huge loss occurred in
2008, the bank included the loss in its audited financial statements for 2007. To justify
that decision, the bank’s management invoked a controversial provision of International Financial Reporting Standards (IFRS).
Case 8.12

Shari’a

517

Islamic companies are prohibited from engaging in transactions that violate Shari’a,
that is, Islamic religious law. To ensure that they have complied with Shari’a, Islamic
companies have their operations subjected to a Shari’a compliance audit each year.
Recently, Big Four firms have begun offering Shari’a audit services.
Case 8.13

Republic of the Sudan

527

In 2004, the SEC began requiring domestic and foreign registrants to disclose any
business operations within, or other relationships with, Sudan and other countries
identified as state sponsors of terrorism. Three years later, the SEC included a Web
page on its EDGAR website that listed all such companies. This SEC “blacklist” proved
to be extremely controversial and triggered a contentious debate over the federal
agency’s regulatory mandate and its definition of “materiality.”
Case 8.14

Mohamed Salem El-Hadad, Internal Auditor

533

Accountants sometimes find themselves in situations in which they must report unethical or even illegal conduct by other members of their organization. This case examines the trials and tribulations of an internal auditor who “blew the whistle” on his
immediate superior for embezzling large sums of cash from their employer, the
Washington, D.C., embassy of the United Arab Emirates.
Case 8.15

Tae Kwang Vina

539

“Environmental and labor practices” audits are one of many nontraditional services
that major accounting firms have begun offering in recent years to generate new
revenue streams. Ernst & Young provided such an audit for Nike, which had been
accused of operating foreign “sweatshops” to produce its footwear products. This case
documents the unexpected challenges and problems that accounting firms may face
when they provide services outside their traditional areas of professional expertise.


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