ISSUES IN ACCOUNTING EDUCATION
Vol. 24, No. 2
Sky Scientifc, Inc.: An Auditing Minefeld
Stephen M. BeMiller, Randy Wirtz, and Deborah L. Lindberg
In 1994, Sky Scientifc, Inc. dramatically overstated assets and under-
stated expenses in its fnancial statements. A Securities and Exchange Commission
(SEC) investigation into those fnancial statements led to charges being fled against
both the company and its auditors. This case takes a detailed look into the independent
audit oF Sky’s fnancial statements For the purpose oF understanding how the auditors
Failed to see the extent to which Sky’s fnancial reporting was misleading and to ade-
quately challenge the assertions presented in the fnancial statements beFore Sky fled
them with the SEC. This case provides an opportunity to examine numerous issues
related to the audit engagement process, including audit planning, the evaluation oF
management representations, the audit evidence process, and auditors’ going-concern
judgments. The roles and responsibilities oF the concurring auditor and an outside
specialist are also discussed.
Sky Scientifc; mining; auditing standards; audit Failures; overstatement oF
ky Scientifc, Inc. (Sky) was Founded by William Dorow in 1991 as a privately held
mining and processing company, which purportedly operated fve mining properties
in the western United States (SEC 1999).
In 1993 the company went public with a
market capitalization oF $2 million. At that time American Capital Network (ACN), the
frm hired to promote Sky’s stock, began circulating tout sheets
under the titles ‘‘Wall
Street Watch’’ and ‘‘Chicago ±inancial Services, Inc.’’ to generate interest in the company
and its stock. These eFForts were successFul as its stock price increased 600 percent, From
$0.75 to $4.50 per share, and its market capitalization rose to $80 million. Sky reported
assets oF $69.7 million and estimated revenues oF $31 million in 1994 (SEC 1999).
The reality oF Sky’s fnancial position was much diFFerent than what was reported.
Assets reported on the balance sheet in 1994 were overstated by at least 95 percent, since
in reality Sky was a company with little to no cash, questionable investments in certifcates
oF deposit (CDs), no revenues, and substantial doubt about its ability to continue as a going
concern. Moreover, none oF the mines would be operating For several years. Barry
Stephen M. BeMiller is a Junior Auditor at the Illinois Agricultural Auditing Association,
Randy Wirtz is a Staff Accountant at Caterpillar, Inc., and Deborah L. Lindberg is a Pro-
fessor at Illinois State University.
The material presented in this case was drawn From several SEC accounting and auditing enForcement releases
and administrative proceedings; since some oF the inFormation From these sources is overlapping, reFerences
provided in the text oF this case will be the primary source where the inFormation was Found.