U.s. Securities and Exchange Commission and Client Personnel

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A brief summary of the case is, Health Management, Inc., a pharmaceutical distributor had a way of calculating their Allowance of doubtful accounts in a way that was not understood by Securities and Exchange Commission and misunderstood by the financial analysts. This caused the financial analysts to put the post earnings per share at $.74 when it was really $.54. Clifford Hotte, the CEO, was told of the $.20 difference by Drew Bergman, the CFO, and told him he refused to take the hit, because the stock would drop. He had Drew Bergman figure out a way to fix it so they would be on target with what the financial analysts predicted. To fix it Drew Bergman overstated the year-end inventory by $1.8 million along with a couple other small adjustments. The main reason they got away with it is because Drew Bergman used to work for the Auditing Company and therefore knew the company’s procedures. Drew Bergman did this by making false papers and had people lie saying a driver left Pittsburgh facility on April 28, with $1.3 million of drugs, two days before the end of the fiscal year. The truck then arrived after the inventory count in New York and another transfer of more than $500,000 going from New York to Pittsburgh, not using the UPS as usual. Finally they used the false papers and people to claim they forgot to count these drugs and therefore boosted their end of year inventory by $1.8 million.
1. BDO Seidman’s attorneys pointed out correctly that professional standards do not prohibit auditors and client personnel from being “friends”. At what point do such relationships result in violations of the auditor independence rules and guidelines? Provide hypothetical examples to strengthen your answer.
As the beginning of the question states: professional standards do not prohibit auditors and client personnel from being “friends.” The point at which a relationships result in violations of the auditor independence rules and guidelines is when the auditor stops being

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