The case is about an accounting fraud that involves the Jamaica Water Properties, Inc. This fraud was discovered by David Sokol, who was at that time served as COO (Chief Operating Officer) of the Jamaica Water Properties, Inc. The main culprit was Ernest Grendi, JWP’s CFO, helped by several of the company’s senior accountants. Moreover, the company’s external auditor, Ernst & Young, seems to be involved as well. This case will show regarding the auditor independence, its duty as professional accountant, fraud, and the perspective from the employees toward their higher-ups management.
Its company’s name, before becoming as JWP, was the Jamaica Water Supply Company. It began its operations in 1886 as a small business that delivered water to a few neighborhoods in the Queens borough of New York City. Gradually, the company expanded its geographic market and eventually became one of New York State’s largest water utilities. In the mid-1960s, Martin Dwyer took control of the company. Dwyer realized that the heavily regulated water utility industry limited his company’s profit potential, so he decided to expand it into other business. Because of his familiarity with governmental agencies, Dwyer began offering various contracting and construction services to local municipalities. Over the next several years, the company expanded into other lines of businesses by acquiring a varied assortment of small firms in the New York City metropolitan area. During the 1960s and 1970s, the company grew rapidly, while its profits and losses vacillated sharply from year to year. But because of severe nationwide recession and other condition at that time, it drove the company to the verge of bankruptcy. Therefore, to salvage the company, Martin stepped down in 1978 and placed his son, Andrew T. Dwyer, in charge. It took Dwyer and his associates several years to fend off complete collapse. They restructured the cost structure of the company to increase cash flow, and in the process they lessened some of the debt that was dragging down the company's growth prospects. In Andrew’s lead, from 1980 until the end of 1991, JWP enjoyed 48 quarters of uninterrupted growth. The company grew from 400 employees working out of five offices in 1980 to over 21,000 employees in 195 offices in 1990. Despite of that, Andrew realized that the company’s growth had resulted in a far-flung and unwieldy organization that was difficult to manage and weighted down by disproportionately high administrative expenses. To overcome that, he went in search of an individual who experienced in managing companies facing difficult circumstances. After a while, he found David Sokol and made him as the COO of the company.
The situation was started to going down after David became a COO. Because of his enjoyment for a challenge, he immediately immersed himself in his new employer’s accounting records. Then, he discovered several suspicious items from the records. His uneasy feeling makes him investigate it further. He was unaware for the fact until he investigated it himself. It turns out that for over the previous several years, the company’s financial data had been embellished by a pervasive accounting fraud. The abusive accounting practices included misapplying the purchase method of accounting for acquisitions, recording the fictitious assets, etc. all those frauds were caused by Ernst Grendi, JWP’s CFO, helped by several senior accountants who was a CPA and a former employee of JWP’s audit firm, Ernst & Young. Over the course of the JWP fraud, Grendi and his accomplices received sizeable money linked to the company’s overstated earnings. Andrew Dwyer and other top executives were never implicated in the fraud even though they benefited financially from Grendi’s scam. After discovering those suspicious entries and discussing it with the divisional CFOs, David Sokol met with Andrew...