In 2008, Arnold Diaz was a bright, upcoming audit managerin the South Florida office of a national public accounting firm. He was an excellenttechnician and a good “people person.” Arnold also was able to bring new business intothe firm as the result of his contacts in the rapidly growing Hispanic business community.Arnold was assigned a new client in 2009, XYZ Securities, Inc., a privately held broker–dealer in the secondary market for U.S. government securities. Neither Arnold nor anyoneelse in the South Florida office had broker–dealer audit experience. However, the AICPAand Arnold’s firm had audit aids for the industry, which Arnold used to get started.Arnold was promoted to partner in 2009. Although this was a great step forward forhim (he was a new staff assistant in 2000), Arnold was also under a great deal of pressure.Upon making partner, he was required to contribute capital to the firm. He also thoughthe must maintain a special image with his firm, with his clients, and within the Hispaniccommunity. To accomplish this, Arnold maintained an impressive wardrobe, bought aBMW and a small speedboat, and traded up to a nicer house. He also entertained freely.Arnold financed much of this higher living with credit cards. He had six American Expressand banking cards and ran up a balance of about $50,000.After the audit was completed and before the 2010 audit was to begin, Arnold contactedJack Oakes, the CFO of XYZ Securities, with a question. Arnold had noticed an anomaly inthe financial statements that he couldn’t understand and asked Oakes for an explanation.Oakes’s reply was as follows:“Arnold, the 2009 financial statements were materially misstated, and you guys justblew it. I thought you might realize this and call me, so here’s my advice to you.Keep your mouth shut. We’ll make up the loss we covered up last year, this year, andnobody will ever know the difference. If you blow the whistle on us, your firm willknow you screwed up, and your career as the star in the office will be down the tubes.”Arnold said he’d think about this and get back to Oakes the next day. When Arnoldcalled Oakes, he had decided to go along with him. After all, it would only be a “shift” ofa loss between two adjacent years. XYZ is a private company and no one would be hurtor know the difference. In reality, only he was the person exposed to any harm in thissituation, and he had to protect himself, didn’t he?When Arnold went to XYZ to plan for the 2010 audit, he asked Oakes how things weregoing, and Oakes assured him they were fine. He then said to Oakes,“Jack, you guys are in the money business, maybe you can give me some advice. I’verun up some debts and I need to refinance them. How should I go about it?”After some discussions, Oakes volunteered a “plan.” Oakes would give Arnold a checkfor $15,000. XYZ would request its bank to put $60,000 in an account in Arnold’s nameand guarantee the loan security on it. Arnold would pay back the $15,000 and have $45,000of refinancing. Arnold thought the plan was great and obtained Oakes’s check for $15,000.During 2010 through 2012, three things happened. First, Arnold incurred moredebts and went back to the well at XYZ. By the end of 2012, he had “borrowed” a totalof $125,000. Second, the company continued to lose money in various “off-the-books”investment schemes. These losses were covered up by falsifying the results of normaloperations. Third, the audit team, under Arnold’s leadership, “failed to find” the fraud andissued unqualified opinions.In 2011, Oakes had a tax audit of his personal 2010 return. He asked Arnold’s firm tohandle it, and the job was assigned to Bob Smith, a tax manager. In reviewing Oakes’srecords, Smith found a $15,000 check payable from Oakes to Diaz. Smith asked to seeDiaz and inquired about the check. Arnold somewhat broke down and confided in Smithabout his problems. Smith responded by saying,“Don’t worry Arnold, I understand. And believe me, I’ll never tell a soul.”In 2012, XYZ’s continuing losses caused it to be unable to deliver nonexistent securitieswhen requested by a customer. This led to an investigation and bankruptcy by XYZ.Losses totaled in the millions. Arnold’s firm was held liable, and Arnold was found guiltyof conspiracy to defraud. He is still in prison today.112 Part 1 / THE AUDITING PROFESSIONa. Try to put yourself in Arnold’s shoes. What would you have done (be honest withyourself now) when told of the material misstatement in mid-2010?b. What do you think of Bob Smith’s actions to help Arnold?c. Where does one draw the line between ethical and unethical behavior?
In 2008, Arnold Diaz was a bright, upcoming audit manager
in the South Florida office of a national public accounting firm. He was an excellent
technician and a good “people person.” Arnold also was able to bring new business into
the firm as the result of his contacts in the rapidly growing Hispanic business community.
Arnold was assigned a new client in 2009, XYZ Securities, Inc., a privately held broker–
dealer in the secondary market for U.S. government securities. Neither Arnold nor anyone
else in the South Florida office had broker–dealer audit experience. However, the AICPA
and Arnold’s firm had audit aids for the industry, which Arnold used to get started.
Arnold was promoted to partner in 2009. Although this was a great step forward for
him (he was a new staff assistant in 2000), Arnold was also under a great deal of pressure.
Upon making partner, he was required to contribute capital to the firm. He also thought
he must maintain a special image with his firm, with his clients, and within the Hispanic
community. To accomplish this, Arnold maintained an impressive wardrobe, bought a
BMW and a small speedboat, and traded up to a nicer house. He also entertained freely.
Arnold financed much of this higher living with credit cards. He had six American Express
and banking cards and ran up a balance of about $50,000.
After the audit was completed and before the 2010 audit was to begin, Arnold contacted
Jack Oakes, the CFO of XYZ Securities, with a question. Arnold had noticed an anomaly in
the financial statements that he couldn’t understand and asked Oakes for an explanation.
Oakes’s reply was as follows:
“Arnold, the 2009 financial statements were materially misstated, and you guys just
blew it. I thought you might realize this and call me, so here’s my advice to you.
Keep your mouth shut. We’ll make up the loss we covered up last year, this year, and
nobody will ever know the difference. If you blow the whistle on us, your firm will
know you screwed up, and your career as the star in the office will be down the tubes.”
Arnold said he’d think about this and get back to Oakes the next day. When Arnold
called Oakes, he had decided to go along with him. After all, it would only be a “shift” of
a loss between two adjacent years. XYZ is a private company and no one would be hurt
or know the difference. In reality, only he was the person exposed to any harm in this
situation, and he had to protect himself, didn’t he?
When Arnold went to XYZ to plan for the 2010 audit, he asked Oakes how things were
going, and Oakes assured him they were fine. He then said to Oakes,
“Jack, you guys are in the money business, maybe you can give me some advice. I’ve
run up some debts and I need to refinance them. How should I go about it?”
After some discussions, Oakes volunteered a “plan.” Oakes would give Arnold a check
for $15,000. XYZ would request its bank to put $60,000 in an account in Arnold’s name
and guarantee the loan security on it. Arnold would pay back the $15,000 and have $45,000
of refinancing. Arnold thought the plan was great and obtained Oakes’s check for $15,000.
During 2010 through 2012, three things happened. First, Arnold incurred more
debts and went back to the well at XYZ. By the end of 2012, he had “borrowed” a total
of $125,000. Second, the company continued to lose money in various “off-the-books”
investment schemes. These losses were covered up by falsifying the results of normal
operations. Third, the audit team, under Arnold’s leadership, “failed to find” the fraud and
issued unqualified opinions.
In 2011, Oakes had a tax audit of his personal 2010 return. He asked Arnold’s firm to
handle it, and the job was assigned to Bob Smith, a tax manager. In reviewing Oakes’s
records, Smith found a $15,000 check payable from Oakes to Diaz. Smith asked to see
Diaz and inquired about the check. Arnold somewhat broke down and confided in Smith
about his problems. Smith responded by saying,
“Don’t worry Arnold, I understand. And believe me, I’ll never tell a soul.”
In 2012, XYZ’s continuing losses caused it to be unable to deliver nonexistent securities
when requested by a customer. This led to an investigation and bankruptcy by XYZ.
Losses totaled in the millions. Arnold’s firm was held liable, and Arnold was found guilty
of conspiracy to defraud. He is still in prison today.
112 Part 1 / THE AUDITING PROFESSION
a. Try to put yourself in Arnold’s shoes. What would you have done (be honest with
yourself now) when told of the material misstatement in mid-2010?
b. What do you think of Bob Smith’s actions to help Arnold?
c. Where does one draw the line between ethical and unethical behavior?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
