Auditing-Case Write Up
30 September 2014
The Leslie Fay Companies
The Leslie Fay Companies is a women’s apparel manufacturer headquartered in New York, but with its accounting offices located in Pennsylvania. The company performed business in a way that did not utilize modern computerized systems to track sales and growth, but in an old-fashioned way that yet, still let them perform well in their revenues and earnings. The major names in this case include the CEO of Leslie Fay Companies at the time of this case, John Pomerantz, Paul Polishan, who was appointed CFO and senior vice president of finance, Donald Kenia, company controller at the company’s accounting quarters, and lastly, the accounting firm that issued the company’s unqualified opinions, BDO Seidman. It is important to keep in mind that the time period of this case is set in the late 1980s and early 1990s where a major recession hit the apparel industry in the United States among many other industries.
The major issue that we are dealing in this case is how Leslie Fay Companies heavily misstated its inventory by overstating the number of dresses manufactured each quarterly period to reduce cost per item thereby increasing the company’s gross profit margin on sales. More fraudulent activities involved are failure to record expenses and liabilities, pre-recording sales, disregarding to write off uncollectible receivables, and ignoring discounts on several outstanding receivables. It was also noted that Polishan used his dominance to intimidate and scare Kenia to follow orders that caused the whole fraudulent issue to occur. Lawsuits filed against Leslie Fay’s senior management, auditing team, and BDO Seidman emerged because of these fraudulent activities and reckless behavior. An overstatement in profits by $80 million also emerged. The end result was that BDO Seidman agreed to a settlement to resolve the issue while both Paul Polishan and Donald Kenia...
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