First Circuit Cases

An implicit theme of this case that I want students to recognize is the contrast between the persistent and vigorous efforts of David Sokol to “get to the bottom” of the suspicious items he uncovered in JWP’s accounting records versus what Judge William Conner referred to as the “spinelessness” of JWP’s auditors. The JWP audits were similar to most problem audits in that the auditors encountered numerous red flags and questionable entries in the client’s accounting records but, for whatever reason, apparently failed to thoroughly investigate those items. On the other hand, Sokol refused to be deterred in his investigation of the troubling accounting issues that he discovered. The relationships that existed between members of JWP’s accounting staff and the Ernst & Young audit team apparently influenced the outcome of the JWP audits. Of course, the Sarbanes-Oxley Act of 2002

The audit committee’s role in financial reporting is to ensure that accurate and transparent disclosure is being presented to the public, investors, and shareholders. The role of top management in financial reporting is to make sure that the financial statements and disclosures are in accordance to GAAP, and that everything disclosed is truthful, while not hurting the business. The

Our project team analyzed the Fraud and Illegal Acts Case (True blood Case Studies- Case 08-9), which involves a questionable sales transaction made between Jersey Johnnie’s Surfboard, an SEC registrant, and Mr. Sinaloa, an independent sales representative of the company. As a simplified overview of the case, an external audit firm was hired on to perform a year-end audit of Jersey Johnnie’s Surfboards, Inc. Towards the end of the audit, the engagement partner notified the auditors that there could be a possibility of fraud and illegal acts made by the company.

2 Managing fraud risk: The audit committee perspective Fraud in a fi nancial statement audit

Does the Universal Circuits’ Irish controller have a convincing argument for the weakness of the dollar? Why or why not? How would you interpret the evidence?

To conduct the audit, the firm must acquire sufficient understanding of the internal control processes to help determine the nature and timing of the audit. However, the audit is not designed to identify deficiencies in internal control or provide assurance. The firm will make the audit committee aware of any significant deficiencies that come to Anderson, Olds, and Watershed’s attention during the audit.

The Third Circuit erred in finding VHI have third-party standing, and his lower court’s decision should be reversed. In general, litigants do not have a standing to assert the rights of others, unless the litigant meet the constitutional and prudential requirement of third party standing. Litigants does not meet constitutional limitation of third party standing unless they sustain or will sustain injury that is actual and imminent. Steel Co. v. Citizens for a Better Environment, 523 U.S. 83, 108 (1998). Moreover, Litigants does not meet prudential requirement of third party standing unless litigants share a close relationship with the right holders, or unless the right holders have a genuine obstacle to sue by their own. Amato v. Wilentz, 952 F.2d 742, 749 (3rd Cir. 1991). Under this analysis, VHI does not have a third party standing because VHI does not meet either constitutional or prudential requirement of third party standing.

She then received information from United Airlines that stated that the disputed amount was refundable through 1990 if certain stipulations of the contractual agreement between the two parties were not fulfilled. The third generally accepted standard of audit fieldwork should be considered as it requires that auditors obtain sufficient competent audit evidence to afford a reasonable basis for an opinion regarding the financial statements under examination. I believe there evidence was sufficient enough bring up a reasonable basis for their opinion on the transaction. The requested information from United Airlines proved that the transaction couldn’t be recorded as revenue but Rognlien insisted that it was a secret agreement with the chairman of United Airlines. However, when Shepherd requested to talk to the chairman she was denied as Rognlien wouldn’t give her the go ahead.

The auditing firm has been in engagement with the company throughout the period when the fraud was being committed. One of the common and clear indicators of possible fraud was the company’s cash flow statement. The company experienced positive growth in its profits from the year 1996 through to the year 1998. However, a close analysis of the cash flow statement shows that the company had experienced negative figures of cash flow from both operating and investing activities and positive cash flow from financing activities which would not sufficiently offset the negative cash flows from operating and investing. It is therefore evident

To be careful “independent” under SOX rule, an audit committee member may not agree any consulting, review or other compensatory costs from the issuer or be an “associated person” of the issuer or a supplementary. requires companies to release whether they have a financial expert. Having someone with financial knowledge puts the audit committee in a stronger position to examination and task the company’s financial statements, decide that

In summation, the courts have can also hold the company liable to the victims under the theory of negligent hiring, retention, and referrals. Within these scopes, the courts have demonstrated that their duties, that the employer owes its employees, clients, providers, and others who meet its employees.

“Audit committee members or their agents may proactively examine areas, functions, and personnel where collusive fraud risk is reasonably likely to be perpetrated,” (Zmags). The search for fraud, even if performed in the same location multiple times, may continue until the audit committee feels confident that they have ruled out the probability that fraud is prevalent. One of the biggest risks of fraud is management override of controls, requiring the extensive search for risk in, “journal entries and other adjustments and reviewing accounting estimates for possible biases that could result in material misstatements,” (Nysscpa).

The audit committee is responsible for the following. It is responsible for reviewing the financial statements, for reviewing the company's compliance and control systems, for monitoring the effectiveness of the internal audit function, assessing the independence and objectivity of the external auditors, and ensuring the employees have the opportunity to raise concerns about matters of financial reporting. The audit committee supports the Board. Ultimately, because the audit committee is comprised of members of the Board, they are elected by the shareholders. Should the shareholders decide, they can replace these members at the annual meetings.

The audit committee’s responsibility was to look over the accounting and financial reporting process as well as the financial statement audits; appoint, compensate and oversee the external auditor; and to ensure that the company has a whistleblower program. (p. 52) At first glance the committee could notice that something was not right with the company’s financial records. But nothing was done and nothing was said.

A company is liable for the wrongful acts of an agent or employee acting within the scope of his authority or in the course of his employment (Lister v Hersley Hall Ltd [2001] 2 All ER 769; Dubai Aluminum Co ltd v Salaam [2003]), as the case with any principal or employer. Sometimes additional rules of attribution are needed in the civil context where intention or knowledge ingredient of the cause of action or defense, for example if a company is to be liable for "knowing receipt" (El Ajoy v Dollar Land Holdings Plc [1994] 1BCLC 464) or knowing being a path to fraudulent trading (Morris v Bank of India). The essential point is that, subject to certain statutory exceptions, in English law it is not possible for a person to sue on, or to be sued on, a contract, unless that person is a party to it. It is a rule which the contract lawyers call privity contract (Suttons v Midland Silicones [1962].