The New York state attorney general's office and the UnitedStates Securities and Exchange Commission have been investigatingTyco (a publicly owned company) and its audit firm. DennisKozlowski (the former chief executive officer), Mark Swartz (theformer chief financial officer), and the former chief counsel(i.e., top lawyer who was an employee of the company) are all saidto have received millions of dollars of money from the company,above the millions of dollars and buckets of shares and/or stockoptions which were approved by the company's board of directors onthe advice of the board's compensation committee. According to newsreports, Dennis Kozlowski personally transferred some of his ownmoney to the head of the board's compensation committee, and alsoallowed that same individual to lease an aircraft from the companyfor one dollar per year. Consequently, one issue being investigatedis whether any members of the board of directors were bribed.
Beyond that one issue, the chief counsel received money from thecompany which was labeled as a "relocation loan," which he used tobuy a fancy house in Utah. At various times, the company hadexecutive offices in two states in the northeastern U.S., butnothing in Utah. One or both of Dennis Kozlowski and Mark Swartzreceived money labeled as relocation loans, and used it toconstruct a fabulous housing compound in Florida--but the company'sheadquarters were never in Florida.
Payments to employees tend to show up in the payroll recordsunder an employee's Social Security number and/or employeeidentification number. For reimbursements for travel expenses andother such items, an employee might also be set up as a vendor andbe paid through the accounts payable system; those vendor IDnumbers are usually alphabetized. Finally, someone might be paidthrough the issuance of a check request, but that also goes throughthe accounts payable system and the related vendor ID number. Thus,each of these three employees is likely to have had both anemployee ID number and a vendor ID number, with all payments fromthe company to them being made under those two numbers, regardlessof what general ledger account the payments wound up in. The SECclaims that those payments were not approved by the board and werenot reported in any of the filings the company made with the SEC.The SEC claims that the individual auditors on the engagement had aduty to report this to the board, and that if the auditors did notknow about this, then either the failure to know was willful orelse the auditors were not competent to perform an audit. In anycase, it seems that material information has been discovered whicheither the auditors did not know about, or did not correctlyhandle, when they rendered their opinion. Based on the pricereaction in the company's securities, that information was clearlymaterial to investors, and if Tyco paid company money by means ofcompany checks, then clearly Tyco knew of the payments and shouldhave reported them. Moreover, the payments were not correctlyclassified in Tyco's accounts, which violates the Foreign CorruptPractices Act.
Required:
1. Does the audit firm have any obligation to do anything nowabout those earlier audit reports? Cite the authoritativeprofessional literature.
2. Design an audit program for asserted and unasserted claimsagainst this client company. Cite the authoritative professionalliterature related to the claims, and show how your audit programfulfills your professional responsibilities.
The New York state attorney general's office and the UnitedStates Securities and Exchange Commission have been investigatingTyco (a publicly owned company) and its audit firm. DennisKozlowski (the former chief executive officer), Mark Swartz (theformer chief financial officer), and the former chief counsel(i.e., top lawyer who was an employee of the company) are all saidto have received millions of dollars of money from the company,above the millions of dollars and buckets of shares and/or stockoptions which were approved by the company's board of directors onthe advice of the board's compensation committee. According to newsreports, Dennis Kozlowski personally transferred some of his ownmoney to the head of the board's compensation committee, and alsoallowed that same individual to lease an aircraft from the companyfor one dollar per year. Consequently, one issue being investigatedis whether any members of the board of directors were bribed.
Beyond that one issue, the chief counsel received money from thecompany which was labeled as a "relocation loan," which he used tobuy a fancy house in Utah. At various times, the company hadexecutive offices in two states in the northeastern U.S., butnothing in Utah. One or both of Dennis Kozlowski and Mark Swartzreceived money labeled as relocation loans, and used it toconstruct a fabulous housing compound in Florida--but the company'sheadquarters were never in Florida.
Payments to employees tend to show up in the payroll recordsunder an employee's Social Security number and/or employeeidentification number. For reimbursements for travel expenses andother such items, an employee might also be set up as a vendor andbe paid through the accounts payable system; those vendor IDnumbers are usually alphabetized. Finally, someone might be paidthrough the issuance of a check request, but that also goes throughthe accounts payable system and the related vendor ID number. Thus,each of these three employees is likely to have had both anemployee ID number and a vendor ID number, with all payments fromthe company to them being made under those two numbers, regardlessof what general ledger account the payments wound up in. The SECclaims that those payments were not approved by the board and werenot reported in any of the filings the company made with the SEC.The SEC claims that the individual auditors on the engagement had aduty to report this to the board, and that if the auditors did notknow about this, then either the failure to know was willful orelse the auditors were not competent to perform an audit. In anycase, it seems that material information has been discovered whicheither the auditors did not know about, or did not correctlyhandle, when they rendered their opinion. Based on the pricereaction in the company's securities, that information was clearlymaterial to investors, and if Tyco paid company money by means ofcompany checks, then clearly Tyco knew of the payments and shouldhave reported them. Moreover, the payments were not correctlyclassified in Tyco's accounts, which violates the Foreign CorruptPractices Act.
Required:
1. Does the audit firm have any obligation to do anything nowabout those earlier audit reports? Cite the authoritativeprofessional literature.
2. Design an audit program for asserted and unasserted claimsagainst this client company. Cite the authoritative professionalliterature related to the claims, and show how your audit programfulfills your professional responsibilities.
