Merry-Go-Round (MGR), a clothing retailer located primarily in shopping malls, was founded in 1968. 10 By the early 1990s, the company had gone public and had expanded to approximately 1,500 stores, 15,000 employees, and $1 billion in annual sales. The company was listed by Forbes magazine as one of the top 25 companies in the late 1980s. Ten years later, the company faced many challenges. Sales fell, and experts speculated that MGR failed to anticipate key industry trends and lost sight of its customer market. To try to regain its strong position, the company acquired Chess King, Inc., a struggling chain of men's clothing stores located in malls, in 1993. The company's sales continued to fall, and later in 1993 the company brought back one of its cofounders to manage the company and wrote down a significant amount of inventory. However, this inventory write-down caused the company to violate loan covenants. Facing bankruptcy, the company, based on the advice of its newly hired law firm Swidler and Berlin, hired turnaround specialists from Ernst and Young (E&Y) to help overcome the financial crisis and develop a long-term business plan. However, the company's decline continued, and it filed for Chapter 11 reorganization in 1994. In 1996, the remaining assets were sold for pennies on the dollar. Subsequently, a group of 9,000 creditors (including former employees and stockholders) began litigation against parties it deemed responsible for their losses. These parties included E&Y, which the creditors sued for $4 billion in punitive and compensatory damages (E&Y's fees from MGR totaled $4.5 million). The lawsuit alleged that E&Y's incompetence was the main cause of MGR's decline and demise. E&Y had a close relationship with Rouse Co., one of MGR’s primarily landlords (E&Y was soliciting business from Rouse and providing significant tax services). Merry-Go-Round Part I. In my opinion, E&Y has violated the Generally Accepted Auditing Standards (GAAS), the general standards (three of them), and the standards of field work (two of them). The audit company seemed to violate the first general standard because it appeared that the company’s staff assigned to the engagement did not have adequate and sufficient technical training or proficiency for the engagement (1 st GS). Also, the relationship of E&Y with MGR’s landlords and attorneys likely conducted them to violate the second general standard, which requires an
You've reached the end of your free preview.
Want to read all 4 pages?
- Spring '16
- Financial audit, U.S. Securities and Exchange Commission, Securities Exchange Act of 1934, Rouse Co.