By looking at these financial statements, one can see there is a huge, constant increase of net income from 1987–1991. According to Auditing and Assurance Services by Alvin A. Arens, Randal J. Elder, and Mark S. Beasley, the auditor needs to have knowledge of the company which includes being knowledgeable of what industry the company is in (such as fashions, food, etc.), knowledge of the company’s creditors, suppliers, customers, in addition, knowledge of how other companies producing “like kind merchandise” is doing (15).
The knowledge of knowing about the company falls under the Standards of Field Work under GAAS, statement #2, “The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures” (35). The Leslie Fay Companies, according to Michael C. Knapp, Contemporary Auditing, “The Leslie Fay Companies” was reporting “impressive sales and earnings throughout the late 1980s and early 1990s” (66).
I begin this research paper by explaining the history behind The Leslie Fay Companies and in doing so, I found an article on the web, “The Leslie Fay Company, Inc. -- Company History”, this explains the history of The Leslie Fay Company (p 1-6). In this article, the author talks about how companies were turning to computers to keep track of their sales, but The Leslie Fay Companies still did not turn to computers (2). The company did the sales over the phone, which is also mentioned in Michael C. Knapp, Contemporary Auditing, “The Leslie Fay Companies” (65). During the late 1980s, according to “The Leslie Fay Company, Inc. – Company History”, Leslie Fay bought many companies taking on their assets and trademarks of the companies, along with some of the company’s liabilities (2). The article talks about how John Pomerantz, in the late 1980s had convinced a huge amount of retailers to take on his merchandise to sell in their stores even though Leslie Fay’s high prices dresses were in jeopardy of selling during this time. The author also indicates how Leslie Fay was being criticized for their merchandise because the merchandise was priced too high, and out of style for this time period, therefore, forcing Leslie Fay to make changes. The author notes how department stores were cutting back on the order to Leslie Fay because these companies could not sell the merchandise.
Because of the lack of merchandise being sold, Leslie Fay had to cut prices drastically, and discontinue some of their styles of merchandise and various clothes labels. During the time, Leslie Fay still managed to produce high sales and profits along with high bonuses for Pomerantz and other associates. By late January 1993, it was discovered that the company’s books were fraudulent in order to show major profits, in fact, by 1990-1992, profits rose to $81 million (p 3-4).
Now that I know who Leslie Fay did business with and realize there was a recession from the late 1980s through the early 1990s, I would seriously look more into how Leslie Fay pulled off extremely high profits during this time. According to Michael C. Knapp, Contemporary Auditing, a Standard Unqualified Audit Report should contain...