The Leslie Fay Companies Knapp Case 1. The financial statement items that I believe should have been particular interest to BDO Seidman are the inventory primarily and then the sales. BDO Seidman should have noticed that according the ratios, the sales were at a steady rate until the year 1991. The inventory of the company was also having issues with sales due to Leslie Fay not keeping up with the latest fashions and because of a slight recession. According to the ratios and common size statement, the current ratio’s trend was similar to the quick ratio which was constantly declining until 1991. . In addition to exhibits one and two, other financial info that the auditor might have obtained was one, the company’s inventory write offs and debts. Other financial information might have included info from the stores that sold Leslie Fay apparel. This is so they can have on record the earnings and liabilities from those stores in contract with Leslie Fay. 3. A couple non-financial variables or factors regarding a client’s industry that auditors should consider when planning an audit is one, the industry itself.
One suggestion is the auditors should research other companies in the same industry. As mentioned in the case, Liz Claiborne CEO was making less than John Pomerantz and their sales were three times more that Leslie Fay’s. That is something that the auditors should pay closely attention to. The question should be “How is Pomerantz Salary higher than a CEO whose company profits are way more than Leslie Fay’s? ” This adds another question to how is something like that possible for Leslie Fay’s CEO to earn more than Liz Claiborne’s.
Another variable is to research and learn the employees, management, history, the business of the company as a whole. The auditors would then have a better understanding of how the company operates their internal controls, and how they establish and influence their goals. It would also create an understanding as to how management utilizes ethical standards. 4. Paul Polishan dominated the entire financial operations at Leslie Fay. He also had the employees (his subordinates) exactly where he wanted.
The beginning of the case explains how Polishan deliberately wanted the company to operate in his best interest. First off, no one individual should be in charge of all accounting and financial reporting of a company. When planning the audit, something that the company should take into consideration is that it is obvious that there was no suitable separation of duties due to one person primarily being in charge of those two important functions. Another thing to remember is that Polishan had no one to question his work, neither his authority because of how everyone already vulnerably followed his rules.
It is also the responsibility of management to adhere to internal controls of the organization. This shows that the company suffered from weak internal controls. One other thing that the company should consider while planning the audit is to get a clear understanding of the company’s internal controls to actually figure out how Polishan manipulated the financials. A company with weak internal controls is more prone to fraudulent activities just as what had happened in the Leslie Fay Case. 5. There were multiple red flags that were obvious in this case.
The SEC ruled that BDO Seidman’s independence was jeopardized because the auditors were irresponsible in auditing and paying attention to the red flags that were shown in the company’s financial statements. In the case, Howard Schilit mentioned that the financial statements of Leslie Fay were full of red flags. It is the auditor’s responsibility to oversee the company’s financial operations. Leslie Fay being operated and controlled primarily by one individual is definitely without question, a red flag. This is something that BDO Seidman should have paid more attention to.