Keystone Case Study

Good morning, your Honor. I am Theresa Pacholik and I am representing Group One. Please let me introduce my colleagues: Chelsea Rowell, Miles Brown and Kimberly Hudson. We come in front of you today with our clients, the Office of Comptroller of Currency (OCC) to show why the court should uphold the decision of the district court against Grant Thornton LLP (Grant Thornton). We will discuss the negligent actions performed during the audit conducted by Grant Thornton and how their unsafe and unsound practices impacted First National Bank of Keystone (Keystone Bank) regulators, shareholders and the public.

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

It is because of Keystone’s poor management quality, overall condition, and questionable bank statements that the OCC required the bank to enter into a formal agreement that included retaining a nationally recognized independent accounting firm. When Grant Thornton was contracted in 1998 to carry out an external audit, Thornton knew that the bank had significant accounting problems and was aware that the federal regulatory authorities were skeptical of the bank. In 1999, the accounting firm gave a favorable impression of the bank’s income statements for 1997-1998 and several months later the OCC discovered that the bank committed fraud and was insolvent. This resulted in the closure of the bank.

On May 8, 2013, U.S. District Judge Jed Rakoff issued a two-page ruling that dismissed the claims in the lawsuit seeking penalties under the False Claims Act, but allowed the claims that sought penalties under Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) to advance. The relevance of the False Claims Act and the FIRREA Law will be further explored in this case. (Viswanatha, Aruna, 2013)

The Interest Group Agendas section in Chapter 5 interconnects that diversity of legislators’ views reflect, or certainly parallels, that of group interests (Rosenthal, A., 2004). This type of correlation points out the important factor that helps groups to surpass individuals on decision-making responsibilities and the mode of interdependence they have. However, positively interdependent (supportive) groups tend to make better decisions than both negatively interdependent (economical) groups and individuals, particularly in complex tasks (Johnson & Johnson, 2012). The Keystone Pipeline System is known as the oil pipeline system in Canada and the United States contracted in 2010 and is presently owned exclusively by TransCanada Corporation. The once-obscure Keystone project became a political symbol amid broader clashes over energy,

The entity in question did not receive an opinion from the audit firm this is because they are provided with few procedures, which do not suffice to provide assurance about the statements. (Fischer, et, al, 2012)Although the audit firm is supposed to come up with opinions concerning the financial position of the county, the G.A.S.B provides limited procedures for the audit firm to manipulate. (Ruppel,

Good morning, your Honor. I am Theresa Pacholik and I am representing Group One. Please let me introduce my colleagues: Chelsea Rowell, Miles Brown and Kimberly Hudson. We come in front of you today with our clients, the Office of Comptroller of Currency (OCC) to show why the court should uphold the decision of the district court against Grant Thornton, LLP. We will discuss the negligent actions performed during the audit conducted by Grant Thornton and how their unsafe and unsound practices impacted Keystone Banks’ regulators, shareholders and the public.

In 2006, $200 million and an estimated 2,000 lives were saved by using a comprehensive safety program called the Keystone Project, which presented a checklist of five crucial steps for central-line catheter placement; as a result, a dramatic reduction in central-line associated bloodstream infections (CLABSIs) was observed. The agency also developed 19 simulation grants to establish a safe environment in which clinicians can obtain proficiency in various clinical settings and procedures such as treating acute myocardial infarction, ultrasound-guided central venous catheter placement, and the disclosure of medical errors (AHRQ, 2012, pp. 7 – 8).

The Substantive Tests of Details in this case found the same issues as the subsequent receipt verification, some of the balances did not meet the mark. It seems the overall audit was conducted adequately with one exception, the incomplete balance information. That is the definition of Qualified Report and the reason I did not choose the other reports, all the facts concerning financial transactions and statements were properly and accurately recorded and statements prepared in conformity with Generally Accepted Accounting Principles (GAAP); or so I thought. My decision to issue the Qualified Report yielded a negative response; I should have opted for the Disclaimer Report. Even though it seemed the rest of the audit went well, I should have looked at the true definition of Quality Report.

The Keystone pipeline runs from Alberta to the coast of the Gulf of Mexico. TransCanada want to rebuild it to go through Saskatchewan, Montana, South Dakota, and Nebraska. This company has a bad history of their pipelines leaking, they were responsible for North America's biggest inland oil spill into the Kalamazoo River. The pipeline also goes through private property, native lands, and state parks which can not just harm humans but animals too by ruining their habitat and contaminating water and other resources. Overall I think that the pipeline is a terrible idea and should be discontinued for the sake of humans, trees, and wildlife.

In November on 2015 President Obama rejected the expansion on the Keystone Pipeline ("The Keystone conundrum" 1). This was not the end of the Keystone XL debate though, TransCanada, the company that hopes to build the pipeline, is suing the United States for being in violation of the North American Free Trade Agreement (NAFTA) (Tucker 1). There is so much controversy surrounding the pipeline because it is not only an economic matter but also an environmental issue. Expanding the already existing Keystone Pipeline, creating the XL Pipeline, would be a smart economic decision for the United States because it would help create jobs and bring in tax revenue while having little negative effects on the environment.

The audit was conducted in accordance with the U.S. generally accepted auditing standards (GAAS), and was performed to obtain reasonable assurance that the statements are free from material misstatement (City and County of Denver, 2017b). It is BKP’s opinion that the financial statements listed above were presented fairly in accordance with GAAP. They also reviewed the required supplementary information provided, however were unable to express an opinion as limited procedures could not deliver sufficient evidence. It was noted that BKM had completed audits of the city’s 2014 and 2015 financial reports, and expressed the same/unmodified opinion (City and County of Denver, 2017b).

“Outside auditors play a crucial role in our nation’s financial system. As the watchdogs of corporate accounting, they are supposed to protect investors” (Hilzenrath, 2010). The question is how effective are these outside auditors in protecting investors? When you think about the failures that have occurred: Enron, WorldCom, Adelphia, Tyco, and Global crossing to name a few, one would really question the effectiveness of these outside auditors. As a result of these failures, Congress pass the Sarbanes Oxley Act of 2002. This act in turn created the Public Company Accounting Oversight Board (PCAOB) to police the outside auditors and ensures they are protecting the investors.

The Auditing Standards Board has launched the Clarity Project (Lindberg & Seifert, 2011) which is an effort to make the U.S. Generally Accepted Auditing Standards (U.S. GAAS) easier to comprehend in the eyes of non-public businesses. “The Clarity Project will result in the first complete redrafting and recodification of U.S. GAAS since 1972” (Morris & Thomas, 2011, para. 2). Four of the most significant changes are: changing the format of the standards so they are more consistent and readable, the wording in the auditor’s report, group audit standards, and the authoritative status on the 10 generally accepted auditing standards (Morris & Thomas, 2011). The Clarity Project also includes the process of integrating the U.S. GAAS with International Standards on Auditing (ISA).

However, due to Arthur Anderson’s relationship with Enron and downfall of Enron, many companies including Freddie, switched their auditors. The fraud was uncovered in 2002 and released to the public, when Freddie Mac’s new auditor, Price Water Cooper House (PWC), started auditing the books. Outcome of violations:Due to the inflated performance reported by Freddie Mac, the shareholders confidence in investing into the company was boosted. The stock prices of the company rose attracting more investors. This was clearly done by manipulating the books and therefore, company was charged with the violations by SEC. The managers of Freddie structured the transactions to alter financial reports that mislead stakeholders about underlying economic performance of the company. “Because Freddie Mac did not correctly account for derivatives transactions intended to hedge against changes in interest rates, the transactions had to be revalued quarterly at their market price, or ''marked to market,'' and included on Freddie Mac's income statement. The value of those transactions changed, while the value of the underlying asset that created the interest rate risk did not.” (The New York Times, November, 2003).Reflections:The top executives involved in the scandal of “Managed Earnings” were David Glenn (COO), Vaughan Clarke (CFO) and Leland Brendsel (CEO). Both CEO and CFO along with general counsels Dean and Dossani ended up