Ten Publicized Audit Failures

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AFM 201 – Part 1 Auditing
Fall 2007
Group Assignment 2

Publicized Cases of Alleged
Audit Failures
Involving Large Public Companies

1) Ten Publicized Audit Failures

i. Parmalat (2003) - Deloitte & Touche Tohmatsu /Grant Thornton

Misleading investors with “Brazen Fraud” was what the United States (US) Securities and Exchange Commission (SEC) had sued Parmalat for in 2003. It all began when Parmalat defaulted on a bond payment worth $185 million. This raised a flag for auditors and banks, which then began to closely examine company accounts. According to Parmalat, 38% of their assets were apparently held in a Bank of America account, part of a subsidiary of Parmalat in the Cayman Islands, worth $4.9 billion dollars. This was later found to be untrue and no such account ever existed. Furthermore, assets were invented to offset liabilities valuing at almost $16.2 billion over a 15 year period, leading the company into a $9.2 billion bankruptcy. Grant Thornton, the auditor at the time of the events, was replaced by Deloitte & Touche Tohmatsu, claiming to be a victim of deceit in the Parmalat audit scandals.

ii. Adelphia (2002) - Deloitte & Touche Tohmatsu

Adelphia Communications was under Pennsylvania and New York federal grand jury, and SEC investigations for making off-balance-sheet loans, amounting to $3.1 billion, to the founders and former Chief Executive Officers (CEO) John Rigas and his sons. This was done by inflating capital expenses and hiding debt, which overstated results. The company itself filed a lawsuit against its former auditor, Deloitte for “professional negligence, breach of contract, fraud and other wrongful conduct,” then filed for bankruptcy protection. It was alleged that the financial performance was masked through deceptive accounting by the executives while pocketing profits for personal benefits without disclosures to the board of directors or the public.

iii. AOL Time Warner (2002) - Ernst & Young

At the time of the AOL Time Warner scandal, sitting in the president’s chair was Robert Pittman. With the purchase of Time Warner, the company’s so called, "strict and effective system of internal controls," brought many inquiries ever since the ad market was faltering. AOL had erroneously inflated advertisement revenues by booking barter deals and ads it sold on behalf of others as sales, to keep growth rates up and to assure a greater stock price through the merge with Time Warner. The cover up went as far as to having documents and e-mails destroyed. Contracts were not only back-dated by executives, but some where even forged, and Ernst & Young, their auditors, as well as federal authorities were lied to according to court documents. AOL Time Warner was ordered by the US Department of Justice (DOJ) to preserve documents and later admitted that they may have overstated revenues by $49 million.

iv. Lucent Technologies Inc. (2002) – Price Waterhouse Coopers

In the year of 2000, Lucent adjusted revenues by $679 million, which prompted SEC investigation. The company had not been doing well after the boom in internet related growth, causing Lucent to violate Generally Accepted Accounting Principles (GAAP) whereby misreporting entire proceeds of an agreement as revenue and operating income. Along with GAAP violations, Lucent executives dodged internal accounting controls and falsified documents to meet revenue targets for their bonuses. For failure to cooperate and turn over documents for SEC investigation, Lucent was fined $25 million by the SEC and was also claimed to have misled the public about investigation. Price Waterhouse Coopers was the auditor for Lucent Technologies Inc. and Henry Schact was the CEO while the company was being investigated for accounting fraud.

v. Waste Management Inc. (2002) Arthur Andersen

Arthur Andersen was the auditor for Waste Management Inc. while Maurice Myers was the CEO at the time. In this case, not only...
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