CBI Holding Company, Inc.
A CBI Holding Company was a New-York based parent company for several wholly-owned subsidiaries. These marketed an extensive line of pharmaceutical products that were purchased from drug manufactures, warehoused in storage facilities and then resold to retail pharmacies, hospitals long-term care facilities and related entities. CBI’s chairman and president Robert Castello was the seat of the CBI‘s troubles and principal implementer of fraudulent schemes. When in 1991 he sold 48 % ownership to TWC, both companies agreed that TWC would have the right to take control of CBI in case of any so-called triggering events. Shortly after this deal in following 1992 and 1993 Castello and his subordinates were intentionally misrepresenting operating results and financial conditional for the end of fiscal years mainly for enlarging Castello bonuses. To be more specific CBI understated payables at the end of fiscal 1992 and 1993 due to its large vendors by millions of dollars particularly by developing the “advances” ruse. These fraudulent activities were thoroughly concealed from TCW’ s appointees to the board and it’s management and CBI auditor- Ernst & Young that from 1990 till 1993 issued unqualified opinions. After the fraud was disclosed E&Y withdrew its 1992 and 1993 unqualified opinions. But in this case E&Y was held responsible for CBI’s bankruptcy. Even though it classified CBI’s engagement like close monitoring due to its higher than normal audit risk and identified accounts payable as a high risk audit area it failed to exercise due care, obtain independence and comply with GAAS. As a result of that Judge Lifland characterized E&Y CBI’s audit as grossly negligent that caused substantial material losses to TWC’s party and CBI’s vendors. II. Questions
1) To my point of view an auditor’s primary objective in auditing accounts payable is to identify weather accounts payable are...
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