CHAPTER IV

FINDINGS AND DISCUSSIONS

Hein+Associates audited the 1993 Financial Statements of Mallon Resources Corporation in

1994 but did not conduct the audit in accordance with professional standards and other
regulations. The following are some of the firms violations:

1. American Institute of Certified Public Accountants (AICPA) Professional Standards Section

101

Duane Knight had an employment offer on February 15, 1994 on the Mallon Resources. Even
though Knight knew that this pending offer will greatly affect his independence while being the
audit manager in the 1993 Mallon Resources audit, he did not inform his superiors about this
matter. The non-disclosure of this kind of situation made his integrity questioned. Furthermore,
under this standard, a covered member should not participate in the engagement until the
negotiations concerning the offer has been settled. In Knight's case, he continued to be involved
while the offer was not yet settled which impaired his independence during that time of the
audit engagement.

2. Generally Accepted Auditing Standards (GAAS)

Knight violated the GAAS by continuing to provide professional services to Mallon Resources
after he accepted the employment offer on February 24, 1994. He prepared "prepared-by
-client" schedules which was then audited by HA and was included in the Mallon Resources
workpapers. His independence was compromised because he was having a dual role, an HA
auditor and a Mallon Resources employee, thereby making him unsuitable to be performing
that kind of work. Since he already accepted the employment offer, his subsequent involvement
in the audit taints the entire audit regardless of the nature of the work.

On the other hand, HA also failed to maintain its independence from Mallon because of Knight's
participation in the engagement when he had already accepted the treasurer position. As a
result, HA issued a false audit report stating that the audit was conducted in accordance with
GAAS.

3. Unprofessional attitude of audit partner

Clarence Hein asked Knight to review the unresolved issues on the audit, join the conference
call and make a memo from Mallon's perspective on March 29, 1994. Being known to him that
Knight already accepted the offer, he still made Knight perform audit related functions thereby
compromising the quality of the audit.
4. False information by the audit firm

The SEC began investigating and on July 5, 1994, HA gave false information regarding the
involvement of Knight in the audit engagement. The firm said that Knight ceased the
performance of audit procedures for Mallon Resources when he received the offer in February
15 when in fact he was doing audit related works until April 14. Another false statement was
Knight started his employment in April 15 but his real employment date was April 1. And lastly,
HA said that Kight had no direct involvement with the audit after the February 15 conversation
with George Mallon. The audit firm just lost the trust and confidence of the public because of
falsifying information for the sake of their own interest.

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