Audit case ZZZZ Best

Audit case ZZZZ Best - 1 Ernst whinney never issued an...

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1. Ernst & whinney never issued an audit opinion on the financial statements of ZZZZ Best; however, Ernst & Whinney did issue a review report on the company’s quarterly statements for the three months ending July 31, 1986. How does a review differ from an audit, particularly in terms of the level of assurance implied by the auditor’s report ? Ernst & Whinney resigned as ZZZZ Best’s auditor on June 2, 1987, following a series of disturbing events that caused the firm to question the integrity of Minkow and his associates. First, Ernst & Whinney was alarmed by a Los Angeles Times article in mid-May 1987 that revealed Minkow had been involved in a string of credit card forgeries as a teenager. Second, on May 28, 1987, ZZZZ Best issued a press release, without consulting or notifying Ernst & Whinney, that reported record profits and revenues. The purpose of this press release was to restore investors’ confidence in the company—confidence that had been shaken by the damaging Los Angeles Times story. Third, and most important, on May 29, Ernst & Whinney auditors discovered evidence supporting allegations made several weeks earlier by a third party informant that ZZZZ Best’s insurance restoration business was fictitious. The informant had contacted Ernst & Whinney in April 1987 and asked for $25,000 in exchange for information proving that one of the firm’s clients was engaging in a massive fraud. Ernst & Whinney refused to pay the sum, and the individual recanted shortly thereafter, but not until the firm determined that the allegation involved ZZZZ Best. (Congressional testimony disclosed that
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the individual recanted because of a bribe paid to him by Minkow.) Despite the retraction, Ernst & Whinney questioned Minkow and ZZZZ Best’s board of directors regarding the matter, at which point Minkow denied ever knowing the individual who had made the allegation. On May 29, 1987, however, Ernst & Whinney auditors discovered several cancelled checks that Minkow had personally written to the informant several months earlier. Because ZZZZ Best was a public company, the resignation of its independent auditor was required to be reported to the SEC in an 8-K filing. One purpose of this requirement is to alert investors and creditors of the circumstances that may have led to the change in auditors. At the time, SEC registrants were allowed fifteen days to file the 8-K auditor change announcement. After waiting the maximum permissible time, ZZZZ Best reported the change in auditors but, despite Ernst & Whinney’s insistence, made no mention in the 8-K of the fraud allegation that had been subsequently recanted. The SEC’s rules that were in effect at the time also required a former audit firm to file an exhibit letter to a former client’s 8-K commenting on the 8-K’s accuracy and completeness. Former audit firms were given thirty days to file the exhibit letter, which was the length of time Ernst & Whinney waited before submitting its exhibit letter to the SEC. In that letter, Ernst & Whinney
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This note was uploaded on 04/19/2010 for the course AKT AKT01 taught by Professor Juleha during the Spring '10 term at Universitas Gadjah Mada.

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Audit case ZZZZ Best - 1 Ernst whinney never issued an...

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