Richard Scrushy Case Summary

From ethical and legal perspectives, what do you feel business has learned from the Scrushy situation?

In 1788, the ratification of the United States Constitution sought to establish the fundamental aspects of the nation’s government, laws, and protections of its citizens’ unalienable rights. Robert G. McCloskey’s The American Supreme Court (2016) explains that, during this period, the prospects of the Supreme Court were essentially unknown. As time progressed, however, the Court began strengthening its legitimacy with its decisions in major landmark court cases which, in turn, established its crucial role in shaping the judicial interests and values of the nation. As such, McCloskey (2016) traces the country’s judicial history by highlighting the Court’s great transitional periods regarding state rights, nation rights, property rights, and slavery. By the start of the 20th century, however, discrepancies began to emerge with the rise of

Dr. Richard Kolecki M.D. 4051 Clubhouse Court Center Valley, Pa. 18034 (484) 767-2196, was advised of the identity of Investigator Sean P. Brennan and of the confidential nature and purpose of the interview, Kolecki, provided the following information:

The story of HealthSouth begins with two of the most well know founders. Richard Scrushy was a bold, charismatic man of middle-class beginnings. He would rise from a mason to one of the highest earning CEO’s in the country due mainly to his ability to drive, charm, and manipulate those around him. Driven by the desire to attain wealth and status Scrushy was hired in at LifeMark where he rose through the ranks as a result of his unbridled competitive nature and workaholic tendencies.

In the R. v. Stinchcombe case, a lawyer was charged with breach of trust, theft and fraud. His former secretary was a Crown witness at the opening of the investigation. She provided relevant evidence towards the defence. Former to trial, she was interviewed by an RCMP officer and a tape‑recorded statement was taken. Far along during the progress of the trial, she again was interviewed by a police officer with a written statement taken. The defence counsel was notified of the occurrence but not of the statements. His request for a disclosure was declined. However, throughout the trial, the defence counsel acknowledge without a doubt that the witness would not be called by the Crown and required an order that the witness be called or that the Crown disclose the main statements to the defence. The trial continued and the accused was found guilty of breach of trust and fraud. Conditional stays were entered with respect to the theft counts. The

) There was a lack of adequate cut-off procedures to ensure the timely recording of certain period-end accruals. This resulted in an audit adjustment of $3,578,000. The benchmark for overall materiality is $3,508,000, I would consider the audit adjustment of $3,578,000 a material misstatement. Control environment, principle 2 the board of directors and management exercise oversight of development and performance of internal controls. Due to the severity and material weakness of lack of adequate cutoff procedures to ensure timely recording of period end accruals. Management and the board of directors should evaluate performance of internal control activities including adherence to standards of conduct and expected levels of competence. In

How much reliance should Enron’s corporate BOD have placed on the Andersen in understanding the company’s accounting decisions and policies?

Overall, there were three “red flags” E&Y was not aware of during the audit. First, they neglected the 500% net income increase from 1999-2001. This should have raised awareness because revenues only increased by 5% during that same period. Second, the internal auditors were denied access to some of the corporate ledgers. E&Y should have seen this as being one of the largest red flags. Third, the audit team failed to properly investigate employee complaints.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate (Louwers & Reynolds, 2007). We believe that the audit evidence obtained is sufficient and appropriate to provide a reasonable basis for our opinions.

1. There are numerous differences between performing a review and actual audit on the financial statements, but the major one is that the review does not contemplate obtaining an understanding of internal control structure. Also, a review does not assess control risk, tests of accounting records and responses to inquiries by obtaining corroborating evidence through inspection, observation or any other audit procedure. It can point out significant matters of the financial statements but does not provide assurance of their accuracy. The issue with ZZZZ Best case is that the auditors review was not sufficient enough to review any misstatements on the financial statements. Ernst & Whinney never questioned the internal control, reviewed

Stable cash flows with estimated total revenues increasing from 559.9 million in 1978 to 937.8 million in 1984 (Note also its strong intellectual property as shown by

E&Y auditors violated their responsibility to the public and to their profession. The auditing standards that were violated were AU 15 responsibility of the auditor to obtain sufficient evidence to provide a reasonable basis for his opinion, AU section 339 preparation and maintenance of working papers, AU 339.01 Principle record of work contains information and conclusions the auditors have reached concerning significant matters in the working papers, AU 339.08 the auditor is required to “adopt reasonable procedures for safe custody of his working papers and retain them for a period, AU 15 was violated when Trauger requested revisions to the workpapers. AU 339, AU 339.01 and AU 339.08 were violated with the

The chief executive of the company was closely working with the vendors whose confirmations were vital in the auditing work and hence they could have submitted false confirmations. The auditing firm established a national risk management program for its clients and so national reviews were done to identify the high risk items in the financial statement. The vendor allowances were particularly high but they were not documented. As such, the auditors were supposed to demand for the documentations and compare them with the real figures. It is however noted that most of the documentations received were non-standard and this could have led to a different audit report given that vendor allowances were earlier identified as a high risk area. Inventory management was found to be poor especially in the allowances for inventory reserves. The audit firm was therefore obliged to carry out a thorough evaluation of the inventory reserves and determine whether it was reasonable. The valuation was also supposed to include all classes of inventory but for the case of the company, the evaluation excluded instances where no sales had been made. Hence, this evaluation could not accurately represent the position of the inventory reserve in the company. (Waters,2003)

B) I think the auditors should have equal responsibility for detecting material misstatements due to error and fraud. It’s their job to make sure the financial statements are as accurate as possible. Although it may be hard to check all the information from a company it’s the responsibility of the auditor to sign off that everything is in check.

In our opinion, with proper use of analytical procedures Ernst & Whinney should have detected the overstatement of the leased assets. The following analytical procedures should have been used, at least at the planning and overall review stages of the audit.