Shannon Baxley ACCT733 Assignment 5-1

In 1969, Paul Polishan received his accounting degree and was hired with an entry-level position at Leslie Fay Company. During this day and age, Leslie Fay created womens clothing which mainly focused on dresses for middle-aged women. In 1972, John Pomerantz became the President of Lesley Fay. Paul Polishan, who was a close friend of John, became Chief Financial Officer and Senior Vice President of Finance (Knapp, 2011, p. 71) not too long after that. Polishan dominated all accounting and financial reporting functions along with his subordinates. Any individual who did not follow Polishans strict policies and rules were subject to severe disciplinary action. If a top manager requested the company financial information, Polishan demanded to have an explanation of why the information was needed. Polishan was definitely hiding something. In 1993, the company controller Donald Kenia came forward stating that he was involved in the accounting fraud that had taken place the three years previous. Kenia went so far as to say he was the sole instigator of this fraud when, in fact, the main perpetrator was Polishan. Polishan required Kenia to take responsibility for the recording of several inappropriate journal entries. These journal entries were not consistent with GAAP and misrepresented events and drastic overstated profit margins for the years in question. Leslie Fays financial ratios were stable and consistent despite the drop in the womens apparel market. Also, during the periods in question, there was a growing change in the fashion industry. Women no longer wanted to wear dresses but were turning to stylish jeans and t-shirts. Two types of misstatements pertinent to fraud and important to auditors are misstatements arising from fraudulent financial reporting and misstatements arising from

Shannon Baxley ACCT733 Assignment 5-1 misappropriation of assets (AICPA AU 316). Misstatements arising from fraudulent financial reporting (AICPA AU 316) are deliberate and are designed to lie to the financial users. Fraudulent financial reporting may be accomplished by the following: manipulation, falsification, or alteration of accounting records or supporting documents from which financial statements are prepared; misrepresentation in or intentional omission form the financial statements of events, transactions, or other significant information; and intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure. (AICPA AU 316) This type of fraud does not have to be the result of a conspiracy to bankrupt a company but it could be that management wants to show a profitable financial statement in the short-term and correct the statement later when results are better. When assets are stolen from the company and not represented correctly on the financial statement, this is considered a misstatement arising from misappropriation of assets. This can be completed in several ways. An actual asset could be stolen, an employee could embezzle receipts, or a company could pay for goods that have yet to be received. There are three conditions normally present when fraud occurs. Usually, there is an incentive to commit the fraud or an employee of the company could feel pressured to commit fraud. Lack of internal controls provides the opportunity for a fraud to be perpetrated (AICPA AU 316). Finally, the person involved in committing the fraudulent act has the mentality that it is ok. Some people are able to rationalize committing a crime even when the individual knows it is dishonest and unethical. However, the greater the incentive or pressure, the more likely an individual will be able to rationalize the acceptability of committing fraud (AICPA AU 316).

Shannon Baxley ACCT733 Assignment 5-1 Both misstatements can be linked to the Leslie Fay auditing scandal. Journal entries were created to manipulate the financial statements to show profit when in fact the company suffered a loss. The companys Wilkes-Barre office had been intentionally falsifying invoices for over a year (Strom, para. 6, 1993). This is an example of a misstatement arising from misappropriation of assets (AICPA AU 316).

Shannon Baxley ACCT733 Assignment 5-1 References

American Institute of Certified Public Accountants. Consideration of Fraud in a Financial Statement Audit. 2002. http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU00316.pdf

Knapp, M. (2011). Contemporary Auditing: Real Issues & Cases, 9th Edition. Mason, OH: South-Western Cengage Learning. Strom, S. (1993). Accounting Scandal at Leslie Fay. The New York Times. Retrieved May 27, 2012. http://www.nytimes.com/1993/02/02/business/accounting-scandal-at-lesliefay.html?src=pm