Case 5.1

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Topics in Contemporary Auditing
Fall 2012

Cardillo Travel Systems, Inc.
Case 5.1

Case Summary

Russell Smith is the controller at Cardillo Travel Systems, Inc. The CEO of the company, Walter Rognlien, is trying to force Smith to sign an affidavit for a transaction to United Airlines. Smith knew that there was “blatant misrepresentation” [ (Knapp, 2011) ] in regards to this transaction, and Smith refused to sign it. When Touche Ross came across the transaction during the audit, the audit partner requested verification from United Airlines in regards to the explanation Rognlien had supplied. After meetings with Rognlien and correspondence back from United Airlines, the audit partner concluded that the $203,210 in question could not be recognized as revenue immediately, because it was refundable through 1990 if contractual agreements were not met.

The partner, Shepard, then filed Form 8-K with the SEC notifying them that Touche Ross would no longer be performing audit services to Cardillo. In the exhibit letter, Shepard indicated the “improper accounting treatment” [ (Knapp, 2011) ] for the United Airlines transaction that misrepresented the financial statements. After this, Cardillo refused to pay Touche Ross for its services prior to the filing of the 8-K. KMG was then hired for auditing, and concluded similar findings as Touche Ross. A civil suit was filed against Cardillo, and press releases were incorrectly stated, underestimating losses.

1. Accountants who faced ethical dilemmas included Russell Smith, the controller at Cardillo; Helen Shepard, the audit partner from Touche Ross; William Kaye, VP of Finance at Cardillo; and Roger Shlonsky, the KMP audit partner. For each of these accountants, not only are Cardillo and the individual audit firms affected, but the individuals themselves could be liable for covering up for this faulty transaction. Each accountant owed the responsibility to adhere to accounting and auditing principles, and...
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