North Face Auditing Case

Topics: Generally Accepted Accounting Principles, Revenue recognition, Auditing Pages: 3 (770 words) Published: September 25, 2013

The North Face, Inc. - Individual Case


The North Face, a company that has always found a way to sell their product to unique customer, didn’t get to where they are today easily. Presently owned by Vanity Fair, The North Face was started by Hap Klopp in the mid 1960s with the mission of providing a ready source of hiking and camping gear to customers. Today, they offer products ranging from outdoor chairs to backpacks.

As the company began to grow, so did the goals set by management. In the mid-90s a goal was set to hit revenues of $1 billion. This goal was deemed manageable based on their operating profit that they had shown over the years. As time passed, the goal became more difficult and the sense of urgency to claim revenue became a must. Several situations led to fines that would later be placed on the company’s executives including:

Christopher Crawford [CFO, CPA]: Claimed revenue from a barter transaction that passed materiality by auditors. This mistake however shouldn’t have passed and was a scheme operated by the CFO who knew the materiality of the testing. Todd Katz [VP of Sales]: Creates phoney sales transactions that would soon be investigated by the SEC.

Without these two fraudulent representations, The North Face would have reported a net loss for the first quarter of fiscal 1998. The cumulative overstatement found by auditors and the SEC was $1.3 million in gross profit for the first quarter of fiscal 1998.

The SEC sanctioned both North Face executives and the auditors involved in the reporting of the financial statements. Fiedelman, the auditor, was criticized for failing to exercise due professional care while reviewing North Face’s financial statements for the first quarter of 1998.

Key Points:

In 1970, NF began designing and manufacturing its own line of products after opening a small factory in nearby Berkeley. The North Face offered a lifetime guarantee on some of their products. Chief...
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