The Leslie Fay Companies was a women’s dress maker established by Fred Pomerantz. a former Women’s Army Corps uniform shaper during World War II. Despite the “volatile and intensely competitive” ( Knapp 34 ) nature of the industry. Leslie Fay grew to hold the 2nd largest one-year gross revenues compared to any of the other publically owned women’s dress makers. merely behind Liz Claiborne. Fred Pomerantz hired Paul Polishan for a place in the accounting section where Polishan befriended Pomerantz’s boy.
John. After Fred Pomerantz’s decease in 1982. John Pomerantz became CEO and president of the board. holding been president of the company and supervising operations ten old ages prior. Polishan was besides promoted and became the company’s CFO and senior frailty president of finance. Although Leslie Fay’s central office was situated in New York City’s garment territory. the accounting office was off-site in Wilkes-Barre. Pennsylvania. Polishan was known for his “strict and autocratic” ( 33 ) regulation in this location.
demanding much from his employees and digesting really small. In Polishan’s absence. the accounting office was run by Donald Kenia. the company accountant. Contrary to Polishan’s demeanour. Kenia was mild and soft-spoken.
The women’s dress industry suffered during the late 80s and early 90s due to the “casualization” ( Knapp 35 ) of American manner every bit good as the economic recession. The desire for more casual-looking apparels led to worsening gross revenues of frocks and other high-end garb. The recession besides caused “many consumers to restrict their discretional outgos.
including the purchase of new clothes” ( 35 ) . This was a major blow to Leslie Fay’s chief customers—department shops. When some of these section shops filed for bankruptcy. Leslie Fay incurred material losingss. “In October 1991. John Pomerantz announced that Leslie Fay had achieved record net incomes for the 3rd one-fourth of the year” ( 36 ) . These net incomes were achieved despite the disabling economic state of affairs and John Pomerantz’s antique concern patterns that shunned “extensive market testing” ( 35 ) and the usage of computing machines. While many rivals were financially fighting. Leslie Fay was turning. On January 29. 1993. Polishan informed Pomerantz of a major fiscal issue ; seemingly Kenia had “secretively carried out” ( Knapp 36 ) an accounting fraud for several old ages. exaggerating net incomes “by about $ 80 million from 1990 through 1992” ( 33 ) and subjecting “approximately $ 130 million of fake entries” ( 39 ) . Leslie Fay’s stock list was inflated. minimizing cost of goods sold and hence increasing the gross net income border.
In add-on to the forging of “inventory tickets for nonexistent products” ( 39 ) and the fiction of “large sums of fake in-transit inventory” ( 39 ) . orders were prerecorded. price reductions were omitted from fiscal statements. and disbursals and liabilities at the period-end were non reported. Almost all of Leslie Fay’s diary entries associating to be were tampered with in some manner. Donald Kenia claimed full duty for the fraud. but because of his compliant nature and low bets in the company. many believed this to be false. Polishan. as CFO. “was straight responsible for the unity of Leslie Fay’s accounting records” ( Knapp 37 ) . and since he ruled the accounting office with an Fe fist. he was thought to hold played a greater function in the cozenage. Kenia lacked an obvious inducement in orchestrating this large-scale fraud since he was non compensated based on net incomes. but other executives. such as Polishan and Pomerantz. who owned a important sum of portions in company stock. did benefit. They received “substantial year-end fillips. in some instances fillips larger than their one-year wages. as a consequence of Kenia’s alleged scam” ( 34 ) .
Pomerantz and Polishan claimed to hold known nil about these accounting mistakes. After the fraud was uncovered. the audit commission investigated and released a study that exonerated Pomerantz ( 40 ) . but Kenia subsequently confessed. in resistance to his original testimony. that Polishan “had overseen and directed every major aspect of the fraud” ( 42 ) . Polishan and Kenia were convicted. In 1997. Leslie Fay was ruled to pay $ 34 million in colonies and filed for bankruptcy. but the company was able to return to a “profitable condition” ( 42 ) before being bought out in 2001. The function of Leslie Fay’s external hearer in the thick of this fraud of course comes into inquiry. BDO Seidman had been Leslie Fay’s “audit house since the mid-1970s and issued unqualified sentiments each twelvemonth on the company’s fiscal statements” ( Knapp 39 ) .
After the disclosure of the fraud. BDO Seidman withdrew these unqualified sentiments for 1990 and 1991. The accounting house took on a similar defence to that of John Pomerantz. claiming themselves as victims of misrepresentation. Leslie Fay shareholders sued BDO Seidman for foolhardy auditing in 1993. Leslie Fay’s fiscal statements had been “replete with ruddy flags” ( 40 ) . lending to the cases. These pending legal conflicts led to questionable hearer independency. therefore doing BDO Seidman to vacate as Leslie Fay’s hearer. Numerous misstatements in about all cost and liability line points leads to the inquiry of whether the deficiency of sufficient internal controls was mostly responsible for the fraud and if the external auditor’s failure to look into Leslie Fay’s internal controls caused them to lose such mistakes.
Business Risk Assessment
Nature of the Entity
The Leslie Fay Companies was a publically traded house on the New York Stock Exchange in the concern of fabricating women’s dress. From its origin. Leslie Fay’s focal point was on bring forthing “moderately priced and conservative frocks for adult females aged 30 through 55” ( Knapp. 34 ) . In 1982. John Pomerantz. boy of Fred. became the company’s CEO and president of the board following a leveraged buyout after the decease of his male parent. The steadfast re-listed on the NYSE in 1986. Pomerantz. Polishan. and other company executives held big parts of company stock. and as a consequence. they had a direct fiscal involvement in the continued fiscal success of Leslie Fay. Top executives were besides the receivers of frequent and big year-end fillips. In some instances. these fillips were greater than their one-year wages.
Structurally. the company CFO and accountant. Polishan and Kenia. had big overruling powers over fiscal informations. Internal controls were badly missing. leting direction to skew about all minutess related to cost. Polishan “‘dominated’ Kenia through bullying and fear” ( Knapp 42 ) . converting Kenia to blow up Leslie Fay’s gross borders. Until the fraud was uncovered. Leslie Fay produced the 2nd largest net incomes in the industry. puting the company in the leaderboard.
Industry. Regulatory. & A ; external factors
To understand the place of Leslie Fay in the late eightiess and early 1990s. it is of import to look at the province of the women’s manner industry at that clip. Leslie Fay’s cardinal rivals included Oscar de la Renta. Donna Karan. and others. However. the firm’s top challenger was Liz Claiborne. “the merely publically owned women’s dress maker in the late eightiess that had larger one-year gross revenues than Leslie Fay” ( Knapp 34 ) . The firm’s chief clients. which were besides shared by its rivals. were the big section shop ironss. Several industry tendencies contributed to economic adversity. The most impactful of these tendencies was the “casualization” ( Knapp 35 ) of America. This was a tendency that had developed a few old ages before and was in full force by the late ’80s. Millions of consumers began to eschew the traditional impressions of women’s manner and opted alternatively to dress in more comfy vesture. This motion began with younger adult females but so hit adult females in the 30 to 55 year-old section. Leslie Fay’s mark market. More specifically. this displacement toward insouciant vesture significantly impacted women’s frock gross revenues.
In the early 1970s frock gross revenues began to worsen as a consequence of the popularity of pants suits. and by the late 1980s the displacement toward casualwear had for good damaged the gross revenues of frocks. All of this was bad intelligence for Leslie Fay. Since they were a maker of “stylishly conservative frocks. ” ( Knapp 34 ) they were stuck in a current towards insouciant vesture with a concern theoretical account trying to swim upstream. The civilization of deregulating in the United Sates that began in the seventiess. took off in the 1980s. and flourished in the 1990s and early 2000s had an affect on the fiscal and accounting sections of many companies. Specifically sing accounting. the PCAOB did non be until 2002. This meant the deficiency of a regulative organic structure to supervise the creative activity of and conformity with accounting and auditing criterions. In add-on. jurisprudence did non yet necessitate the modern. SOX-created version of the audit commission. responsible for the hiring and fire of the external hearers among other things.
The CFO and CEO were non required to personally certify ( with a signature ) to the truth of the company’s fiscal statements. giving them less answerability. The overall deficiency of answerability for CFOs and CEOs and the more mellow attack that hearers took during that clip period enabled Leslie Fay’s dirt to go through through unnoticed for that long. A assortment of external factors influenced Leslie Fay. Most of import was the recession of the late eightiess and early 1990s. The recession merely heightened the jobs in the women’s manner industry. as consumers began to watch their disbursement and spent less on new apparels.
There was an overall economy-wide diminution in retail disbursement. which hurt concern for the major section shops that were Leslie Fay’s clients. As a consequence of weak retail gross revenues. many section shop ironss were forced to either merge with rivals or to neutralize. This injury Leslie Fay because the lasting section shops. with which the house did concern. “wrangled fiscal grants from their suppliers” ( Knapp 35 ) . As Leslie Fay’s primary clients took hits during the economic recession. the fabrication house besides suffered great losingss.
From the information presented in the instance by Knapp. it is apparent that Leslie Fay did non hold an effectual system of internal controls. First and foremost is the fact that the firm’s accounting offices were located 100 stat mis off from corporate central office. Bing this far off from the Garment District in Manhattan would hold made it hard for internal and external hearers to hold a complete apprehension of how Leslie Fay’s concern operated since they could non physically detect it. In add-on. most accounting forces located in PA could non discourse issues face-to-face with people in corporate central office. Paul Polishan made frequent trips to New York. nevertheless he was finally responsible for orchestrating the accounting fraud. and his bossy leading manner exacerbated the issue.
Anyone who asked for records had to instantly reply to Polishan. supplying a ground why they needed to cognize that information. This gave Polishan the possible ability to cover up information before anyone else could see them. Leslie Fay besides had a deficiency of any type of information engineering system. In an age where it had become platitude in the industry to utilize computing machine webs to supervise day-to-day gross revenues. the house was still doing calls to clients on a hebdomadal footing to enter gross revenues Numberss ( Knapp 35 ) .
This made it easier to pull strings gross revenues and stock list Numberss towards the terminal of accounting periods. particularly when sing Polishan’s strong belief. because a deficiency of IT meant less-precise Numberss. In add-on. the accounting offices in PA were non up to rush with modern informations processing ; instead they did more work by manus. Last. the extent of the influence that Polishan had over Kenia. the accountant. and finally the full accounting procedure. indicated a deficiency of cheques and balances within the system. Knapp provinces in the instance that Kenia and other subsidiaries followed any order given by Polishan merely due to his bullying factor. A good system of internal controls would guard against this. a cardinal agreement Leslie Fay clearly lacked.
Aims. Strategies. & A ; Business Risks
Leslie Fay had received ailments from consumers that its vesture line was excessively “old-fashioned. ” “matronly. ” and “overpriced” ( Knapp. 36 ) . Given these fortunes. the house should hold sought to revamp their merchandise line and industry more voguish vesture while remaining true to the basic thoughts about manner that Leslie Fay was known for. Unfortunately for the company. John Pomerantz insisted on making concern the antique manner and relied on himself and his interior decorators to calculate manner tendencies. This might hold worked had Pomerantz known what the overall tendency in the women’s manner industry was. but he did non do usage of market proving to see what adult females were truly looking for in vesture. The house faced many concern hazards during this clip period. The recession heightened competition as many houses were all aiming the same market section that was passing less on new vesture.
There was besides force per unit area to get the better of Liz Claiborne as the gross revenues leader in the industry. Leslie Fay was besides pushed to develop trendier vesture in a changing set of consumer demands. The settlement and amalgamations of section shops led to many write-downs and loss of income for the fabrication house. Leslie Fay was besides capable to less-advantageous gross revenues footings forced upon them by the shops such as longer payment footings. more indulgent return policies. and increased fiscal aid ( Knapp 35 ) .
As ever. the force per unit area is on maintaining costs down in the market they are in. Since they aimed for reasonably priced vesture. the house needed to drive down costs in order to do a net income on their ware. The house had to maintain gross revenues and net incomes up all while factoring in these alterations in the economic system and in their specific market place. Leslie Fay faced the force per unit areas of run intoing analysts’ projections. since they were a publically traded company. If they did non run into projections. they were capable to a loss of investor capital. Healthy fiscal Numberss were besides of import to keep for the interest of maintaining creditors happy. The house needed funding from both loaners and investors in its common stock to back up the design and industry of its vesture.
Entity Performance Measures
The province of the economic system and industry in the late eightiess and early 1990s led to cut down disbursement. which would hold translated to take down gross revenues and net incomes for most houses in the manner industry. However. as noted in the instance and as seen by Leslie Fay’s financials. the house was accomplishing record net incomes despite a slow retail industry ( Knapp 36 ) . Some cardinal fiscal ratios and observations are presented in Exhibit 1. An analysis of these ratios shows that. harmonizing to Leslie Fay’s doctored fiscal statements. they were more liquid than the industry norm. but less solvent.
They had lower stock list. histories receivable. and plus turnover ratios than the industry. and the ages of their stock list and histories receivable were higher than the industry norm. Their gross border per centum was about on par with industry norm. nevertheless they showed a higher net income border on their gross revenues ( by 1. 31 % ) every bit good as a significantly higher ROA ( 9. 79 % higher ) . Their Roe was lower than the industry norm. A higher net income border on gross revenues. together with reduced gross revenues from 1990 to 1991. suggests that Leslie Fay manipulated cost-side entries.
Changes in consumer behaviour of the women’s dress industry pressured Leslie Fay as it suffered a diminution in clients in the 1970s and 1980s. During this clip. manner tendencies were switching to go more insouciant. and new manners included more comfy. well-worn garments like denims and jerseies. Even Leslie Fay’s mark market of adult females between the ages of 30 and 55 were dressing more casually and buying less frocks. As tierce of Leslie Fay’s entire gross revenues are attributed to frocks. Leslie Fay felt the force per unit area of the alteration in the dress industry ( The Leslie Fay Company Inc. History ) . It was besides affected by the economic recession of the late eightiess and early 1990s. The company’s major clients. section shop ironss. experienced a diminution in retail disbursement due to this recession ( Knapp 35 ) .
The fiscal strain on section shops caused them to demand fiscal grants from providers like Leslie Fay. The company was asked to let the section shops longer payment footings and more indulgent return policies. and to supply more fiscal aid for in-store shows. booths. and apparel dress shops ( Knapp 35 ) . Retailers criticized Leslie Fay of fabrication apparels that were overpriced and antique. The company was forced to give discounts to sweeping clients that could non sell all of the dress they had purchased. Pressure from retail merchants created an environment that burdened Leslie Fay with happening new ways to maintain up net incomes.
Executive compensation is another inducement to perpetrate fraud. Executives including Pomerantz and Polishan had significant involvements in the Leslie Fay Companies as they owned big blocks of the company’s stock. In add-on. executive fillips were highly generous. sometimes transcending one-year wages ( Knapp 34 ) . Top executives whose fiscal involvements were to a great extent invested in Leslie Fay through stock ownership and these big fillips were more likely to perpetrate fraud for their ain personal benefit.
A important facet of Leslie Fay’s operations was the geographical difference between corporate central offices and the accounting offices. Corporate central offices were located in Manhattan. while the accounting offices were 100 stat mis north-west in Wilkes-Barre. Pennsylvania. Paul Polishan dominated the Wilkes-Barre office. nicknamed “Poliworld. ” as the CFO and senior frailty president of finance. This physical separation between the accounting section and other executives and top direction created an chance for fraud. Finance and accounting employees were non as closely supervised as those in the corporate central offices due to this geographical gulf.
This besides limited the internal controls that could be implemented over the accounting section ( Knapp 33 ) . Public accounting houses were non yet regulated by Sarbanes-Oxley. making an chance for Leslie Fay Companies to perpetrate Fraud. SOX mandates that public companies obtain an incorporate audit. including an audit of fiscal statements and internal controls over fiscal coverage ( Messier 43 ) . BDO Seidman was non required to carry on an audit of internal controls as there was no bing ordinance. This means that management’s actions associating to fiscal coverage were non needfully being investigated by its external hearer. This deficiency of ordinance affected the audit processs performed by BDO Seidman. which left the internal control system unchecked.
Paul Polishan’s ruling personality made him a powerful influence over his subsidiaries. particularly Donald Kenia. Polishan purely ruled the Wilkes-Barre offices and when senior directors from the corporate central office asked him for fiscal information he frequently demanded the ground they needed the information ( Knapp 33 ) . This defensiveness which should hold been a ruddy flag created an environment where people were hesitating to oppugn Polishan. The relationship between Kenia and Polishan was besides closely examined during the probe of Leslie Fay. Kenia claimed to hold been “dominated” by Polishan through bullying and fright ( Knapp 42 ) . Polishan’s dashing personality allowed him to intimidate Kenia and his staff into distorting fiscal minutess and commit fraud. Polishan’s laterality at Leslie Fay put a strain on internal controls.
1. A common size balance sheet and income statement. every bit good as cardinal fiscal ratios are detailed in Exhibits 2 through 4. Key ratios that should pull hearer attending include stock list turnover and age of stock lists. histories receivable turnover and age of histories receivable. gross border. and net income per centum. The low and continuously diminishing stock list turnover and similar histories receivable turnover that the ratio spreadsheet shows means that stock list is sitting for 85. 68 yearss in stock before it is sold. and when it is finally sold Leslie Fay is non having the money owed to them for 56. 33 yearss. While this is to be expected in the recession that the company was confronting during this clip period. it is significantly longer than the industry norms of 53. 7 yearss for stock list and 45. 5 yearss for histories receivable.
This should pull hearer attending to the stock list and histories receivable lines on the balance sheet. doing certain they are valued right and wholly. including appropriate allowances. With clients purchasing less and taking longer to pay for it. how does the company maintain the steady gross border and net income border in line with and transcending industry norms. severally? This is the cardinal inquiry that should hold drawn auditor attending and where hearers should hold exercised their professional incredulity. Decreasing stock list turnover and histories receivables turnover is to be expected in difficult times when clients want to purchase less and some are even traveling insolvent. but more attending should hold been focused on how Leslie Fay managed to transcend the remainder of the industry in net income border ( Leslie Fay’s 3. 5 % compared to the industry norm of 2. 2 % ) under these conditions.
2. In add-on to the balance sheet. income statement. and fiscal ratios. an hearer would wish to hold other cardinal fiscal information to execute the existent audit. For the hearer to make up one’s mind what extra fiscal information was needed. he would foremost execute a comparing similar to that in Question 1. which evaluated the hazards on the fiscal statements. particularly in relation to industry norms. Through this analysis. the hearer would hold decided that physical stock list counts and substantial analysis of the stock list would be of import information to hold because Leslie Fay is a merchandising company whose concern wholly relies on its stock list. During a recession. it would besides be of import to verify gross revenues and the gross border. to guarantee that gross border is really higher than industry norms as the company claims.
The hearer should scan for big and unusual entries. particularly at the terminal of the period. to guarantee that Leslie Fay is non merely fabricating extra stock list at the terminal of the period to convey down the cost of goods sold. Hearers should besides corroborate gross revenues with the clients both for happening and completeness of the minutess that were recorded. During this cheque it would be of import to read gross revenues contracts to guarantee that gross was recognized consequently. Finally. the hearer would necessitate to verify that Leslie Fay included a big adequate allowance for dubious histories. During this period there was a recession and many clients were unable to pay or were traveling out of concern. a major concern for company.
3. When measuring a company’s industry. it is of import to observe the current economic system and the peril of the industry itself. Even before the recession hit. Leslie Fay was non large on alteration ; it did concern without the usage of much engineering or consumer trailing. even in the accounting sections. In the extremely volatile manner industry. how did Leslie Fay header with invariably altering manners and gustatory sensations? They tried to foretell altering manners on their ain. without any trailing of consumer penchants to assist steer them ( Knapp 35 ) . Leslie Fay was taking a hazardous attack to a hazardous market. As the economic system declined. this manner industry merely became more hazardous. The industry was clearly in a ruin due to the recession and the culture’s motion off from frocks. both of which caused a lessening in how many frocks were purchased by retail clients.
In this sort of market. it would be of import for the hearers to non merely garner non-financial information about Leslie Fay and the manner industry. but they should besides garner information about Leslie Fay’s clients. the large section shops. to find whether or non they will be able to pay for outstanding histories receivable. This information would assist find an appropriate allowance for dubious histories. which would act upon the sum of gross revenues recorded in the income statement and the histories receivable balance on the balance sheet.
The downward force per unit area on the industry would greatly increase the inducements and force per unit areas to keep good financials. which in bend. would increase the hazard of fraud. All of these factors should act upon the type and measure of the trials performed by the hearers. Hearers should corroborate purchases with clients. and inquire interior and outside the house for how Leslie Fay merchandises fit in the market. The downswing of the economic system should besides increase the proving done to the gross revenues account to guarantee that they really happened to reply this inquiry: How did Leslie Fay net income when all other companies in the market were losing gross?
4. As antecedently mentioned. Paul Polishan played a really dominant function in the accounting and finance sections in add-on to his subsidiaries at Leslie Fay. When there is such a dominant individual at the top. particularly one that has great control over subsidiaries. the dependability of the fiscal information lessenings. The dominating figure decreases the cheques and balances within the company that guarantee right information. which increases chances for fraud. Hearers need to acknowledge this figure and program consequently to ask about company information from both internal and external independent beginnings. maintaining in head that the dominant individual could besides compromise internal enquiries. The hearers must acknowledge the important force and seek to analyze the facets that he had definite control over deeper. The hearer should seek out the motives that the dominant participant may hold and analyze countries that he would desire to hold altered.
For illustration. Polishan’s personal income was greatly influenced by stock monetary value. significance that he would desire to blow up net incomes to increase market value. Hearers must. therefore. lessening sensing hazard and sample potentially affected histories more. The hearer should so take the clip to carefully measure direction averments about completeness. rights and duties. rating and allotment. and being of history balances and minutess that have taken topographic point. Overall. the hearers need to get down to scrutinize a company with a dominant figure like Polishan with a good degree of professional incredulity. recognizing that the tone at the top decreased the internal controls and they will hold to increase the sum of proving and asking done to acquire an accurate image of the company’s financials.
5. Independence and objectiveness are two of the most of import external hearer features. The SEC ruled that BDO Seidman’s independency had been jeopardized by the cases that named BDO Seidman and Leslie Fay as suspects because of the deficiency of objectiveness that the accounting house would hold if they performed the following year’s external audit. Because the shareholders’ case against them put BDO Seidman and Leslie Fay on the same side. BDO Seidman now had a personal interest in Leslie Fay’s fiscal statements and was no longer independent of the firm’s financials. If BDO Seidman were to execute the audit. the stockholders would non be able to trust on or swear the fiscal statements ; they would presume that BDO Seidman would change the auditing procedure to their benefit.
The case was non the lone object of conflicting involvement between BDO Seidman and Leslie Fay. GAAS # 2 provinces that an external hearer must be independent in the manner of thought. After the fraud was revealed. BDO Seidman retracted two unqualified sentiments for the past two old ages and publically stated that they were victims of the Leslie Fay fraud. faulting Leslie Fay’s upper direction for the full strategy. This blasted game back and Forth between Leslie Fay and BDO Seidman clearly eliminates any possibility for hearers to travel into a Leslie Fay audit with an independent mentality.
1. The fraud would hold been more noticeable to the external hearers had SOX been implemented at that clip. Howard Schilit. a forensic accounting specializer. “suggested…that Leslie Fay’s fiscal informations had been full with ruddy flags” ( Knapp 40 ) . bespeaking that adequate abnormalities were present to warrant farther examination. One of the largest constituents of SOX is the probe of internal controls. Such an probe would hold helped the external hearers realize that the information they were given was non to the full dependable. BDO Seidman should hold evaluated the cheques in Leslie Fay’s system. doing certain that neither Donald Kenia. the accountant. nor Paul Polishan. the CFO and senior frailty president of finance. were able to fiddle with the fiscal informations without ordinance.
The deficiency of any kind of IT system due to the CEO’s peculiar affinity to “old-fashioned” ( Knapp 35 ) tradition besides gave more power to executive management—they had absolute control over the fiscal informations without electronic grounds of fiddling. The legion ruddy flags described by Schilit make it evident that BDO lacked professional incredulity in this instance. ensuing in the unqualified audit studies for Leslie Fay’s fiscal statements.
2. The proper executing of audit trials would hold enabled BDO Seidman to bring out the accounting mistakes. Inquiry of Leslie Fay forces would hold rapidly indicated that Polishan had absolute control over the fiscal informations. doing the hearer to so prove internal controls. An experimental review of the application of internal controls should hold been administered so BDO Seidman could see what checks Leslie Fay had in topographic point to modulate their fiscal informations. If this was decently observed. executive management’s control over the fraud may hold been revealed. Many substantial processs could hold been implemented to further uncover mistakes. A trial of inside informations would hold shown mistakes in all the major line points sing cost and liabilities. Substantial trials of single minutess. such as with purchase bills. could demo that the stock list reportedly in-transit did non really exist.
A walkthrough and review of paperss and activities would uncover that much of the stock list reported was falsely recorded because there would be no organic procedure in which existent stock list entered the warehouse and was recorded—since they were fabricated. the perceiver would hold recognized this cardinal measure. A trial of history balances would besides demo that the stock list on manus did non fit up to the reported sums. Substantial analytical processs are cardinal in this instance. Due to hapless economic fortunes and rival battles. a ruddy flag should hold been raised when Leslie Fay continued to describe net incomes growing but failed to explicate how.
Since fillips were tied to net incomes. executives had inducement to blow up their Numberss. Pomerantz’s “total wage and fillips of “3. 6 million [ was ] three times more than the 1991 compensation of Liz Claiborne’s CEO. whose company reported gross revenues more than double those of Leslie Fay’s” ( Knapp 40 ) . BDO should hold compared Leslie Fay to other companies in the women’s dress industry. observing differences in tendency lines. The elephantine fillips may hold indicated that company operations were non management’s largest concern.
The accounting fraud engineered by Paul Polishan. CFO and SVP of finance at Leslie Fay. doubtless tarnished the repute of Leslie Fay and its direction. every bit good as BDO Seidman as its hearer. Many factors finally contributed to the $ 80 million accounting fraud that was eventually uncovered in the early 1990s. One of the major factors included a terrible deficiency of internal controls. No employee would contend the domineering Polishan. particularly the second-in-command at the office. Donald Kenia. the accountant. In add-on. whenever an employee or direction at the corporate central office would bespeak fiscal information from Polishan. he would oppugn them about why they needed the information. which should hold been a mark that possibly something illegal was go oning behind the scenes. Not merely was there a big communicating job between the executives of the company. but besides the deficiency of transparence between executives was amazing. as other executives were in the dark refering the fraud. Leslie Fay’s continued success in a fighting women’s manner industry should hold sparked BDO Seidman to look more closely into the fiscal information provided by Polishan. and possibly carry on substantial analytical processs on a more elaborate degree.
BDO Seidman besides should hold actively compared Leslie Fay to its close rivals. and the industry as a whole. to see that cardinal fiscal ratios did non fit the general tendency. The chance and inducements for Paul Polishan to perpetrate fraud were both present. The physical distance of Polishan from central offices opened up a big chance for him to perpetrate fraud. In add-on. he had an employee willing to take the autumn for him when the fraud was uncovered. With this chance. Polishan was able to hedge bad fiscal statements that the worsening women’s manner industry would hold given him and increase his fillip. which was tied straight to the net incomes of Leslie Fay. Had the Sarbanes-Oxley ( SOX ) statute law been implemented prior to the accounting dirt at Leslie Fay. the fraud would hold been more easy noticeable. SOX would hold held executives accountable for the truth of fiscal statements The external hearer would besides hold been held to a higher criterion of supplying sensible confidence as to the truth of the company fiscal statements.
Even though BDO Seidman merely provided an “unqualified opinion” on the truth of the statements. SOX would hold prevented BDO Seidman from being so careless in their auditing of Leslie Fay. Last. SOX would hold required an in-depth reappraisal of internal controls. which Leslie Fay was missing. The deficiency of internal controls at Leslie Fay. and BDO Seidman’s ignorance of this job. was a major part to the deceitful accounting strategy that took topographic point. If the external hearer. BDO Seidman. had performed a proper reappraisal of Leslie Fay’s internal controls. they would hold uncovered a complete deficiency of said controls. including a deficiency of cheques and balances between top direction. This lack caused a major gulf between the CFO and other company executives. with the critical job being information dissymmetry between the two parties.
The accounting offices of Leslie Fay were located a 100 stat mis from the corporate central office. fostering the spread between the CFO and other top direction. and non leting the accounting squad to physically see the operations of the company. Additionally. Leslie Fay lacked any type of information engineering system. and alternatively tracked day-to-day gross revenues and stock list counts by manus. This allowed for easier use of informations linked to the net incomes procedure of the company. As seen through the state of affairs at Leslie Fay. strong internal controls. and the ordinance of these controls. is indispensable to the uncovering and bar of fraud within any company. The effectivity of the internal controls should be tested by the external hearer. every bit good as sporadically evaluated by executives of the company.