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 toshow up in the payroll records under an employee's Social Securitynumber and/or employee identification number. For reimbursementsfor travel expenses and other such items, an employee might also beset up as a vendor and be paid through the accounts payable system;those vendor ID numbers are usually alphabetized. Finally, someonemight be paid through the issuance of a check request, but thatalso goes through the accounts payable system and the relatedvendor ID number. Thus, each of these three employees is likely tohave had both an employee ID number and a vendor ID number, withall payments from the company to them being made under those twonumbers, regardless of what general ledger account the paymentswound up in. The SEC claims that those payments were not approvedby the board and were not reported in any of the filings thecompany made with the SEC. The SEC claims that the individualauditors on the engagement had a duty to report this to the board,and that if the auditors did not know about this, then either thefailure to know was willful or else the auditors were not competentto perform an audit. In any case, it seems that materialinformation has been discovered which either the auditors did notknow about, or did not correctly handle, when they rendered theiropinion. Based on the price reaction in the company's securities,that information was clearly material to investors, and if Tycopaid company money by means of company checks, then clearly Tycoknew of the payments and should have reported them. Moreover, thepayments were not correctly classified in Tyco's accounts, whichviolates the Foreign Corrupt Practices Act.
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 toshow up in the payroll records under an employee's Social Securitynumber and/or employee identification number. For reimbursementsfor travel expenses and other such items, an employee might also beset up as a vendor and be paid through the accounts payable system;those vendor ID numbers are usually alphabetized. Finally, someonemight be paid through the issuance of a check request, but thatalso goes through the accounts payable system and the relatedvendor ID number. Thus, each of these three employees is likely tohave had both an employee ID number and a vendor ID number, withall payments from the company to them being made under those twonumbers, regardless of what general ledger account the paymentswound up in. The SEC claims that those payments were not approvedby the board and were not reported in any of the filings thecompany made with the SEC. The SEC claims that the individualauditors on the engagement had a duty to report this to the board,and that if the auditors did not know about this, then either thefailure to know was willful or else the auditors were not competentto perform an audit. In any case, it seems that materialinformation has been discovered which either the auditors did notknow about, or did not correctly handle, when they rendered theiropinion. Based on the price reaction in the company's securities,that information was clearly material to investors, and if Tycopaid company money by means of company checks, then clearly Tycoknew of the payments and should have reported them. Moreover, thepayments were not correctly classified in Tyco's accounts, whichviolates the Foreign Corrupt Practices Act.
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.
