Where was Cuss’s audit committee? How could Ernst & Young, ALP not detect the fraud? Walter Forbes, chairman and CEO of CUE, and Kirk Shelton, Chief Operating Officer (COO) of CUE, ended any involvement or knowledge of the alleged fraud. Ascendant audit committee, which oversaw the fraud investigation, concluded that Walter Forbes and Kirk Shelton because of their positions, had responsibility to create an environment in which it was clear to all employees at all levels that inaccurate financial reporting would not be tolerated.
The fact that there is evidence that many of the senior accounting and financial personnel participated in irregular activities and that personnel at many of the business units acquiesced in practices which they believed financial reporting did not exist. Form 8-K, Ascendant Corporation, August 8, 1998) They also noted that: Senior management failed to have in place appropriate controls and procedures that might have enabled them to detect the irregularities in the absence of actual knowledge of those irregularities. Form 8-K, Ascendant Corporation, August 8, 1998) Information obtained during the fraud investigation suggests that Cosmos Corralling, CUFF of CUE, directed or was aware of several of the irregular activities noted during the investigation. Evidence also suggests that Anne Bumper, the controller of CUE, who reported directly to Corralling, directed individuals to carry out some of the regular activities noted. All told, more than twenty CUE employees were identified as participating in the fraud. How could Cuss’s board of directors and audit committee not ferret out the fraud?
The board of directors for CUE met several times during the year and reviewed financial reports that contained the fraudulent information. Were the outside directors too cozy with senior management? Four of Cuss’s directors were noted as having personal ties with Walter Forbes through other joint investments in startup companies. 2 Did Ernst & Young, ALP exercise the professional skepticism required of an external auditor? Were the auditors inappropriately swayed by CUE employees who were formerly employed by Ernst & Young?
Two alleged leaders in the fraud, Cosmos Corralling and Anne Bumper, along with two other financial managers of CUE, were previously employed by Ernst & Young. Moreover, Cosmos Cornelian was an auditor on the CUE engagement prior to being employed by CUE. The audit committee report on the fraud investigation notes several instances in which Ernst & Young did not substantiate or question fraudulent transactions. However, the report also shows that the senior management of CUE encouraged subordinates not to show certain information to the auditors.
Additionally, the report notes instances in which the auditors accepted incomplete answers from management regarding Cuss’s financial performance. During the late sass and early sass, CUE was required to amend its financial statements filed with the Securities and Exchange Commission several times for using aggressive accounting practices, such as capitalizing marketing costs in place of using the standard practice of expensing them as incurred. 3 Why didn’t these problems sensitizes the auditors to the potential for problems with financial reporting?
EPILOGUE Walter Forbes, chairman of the board of Ascendant and former chairman and CEO of CUE, and 10 other members of Ascendant board of directors formerly associated with CUE tendered their resignations shortly after it was announced that the fraud was more widespread than initially believed. Ascendant board of directors, after reviewing the fraud investigation report, dismissed Kirk Shelton, COO of CUE, for cause, eliminating the company’s obligation to fulfill his previously negotiated severance package. Walter Forbes was allowed to receive a severance package totaling $47. 5 lion given that he was not directly linked to the fraud.
In January 1999, Ascendant Corporation filed a lawsuit against Ernst & Young, ALP for allegedly violating professional standards. No resolution of this lawsuit was made public as of the outcome of the investigations by the Securities and Exchange Commission and the U. S. Attorney for the District of New Jersey. Questions 1 . What responsibility does an auditor have to detect material misstatements due to errors and fraud? A. What categories of fraud affect financial reporting? B. Which factors existed during the 1995 through 1997 audits of CUE that created an environment conducive for fraud? . Several misstatements were identified as a result of the fraud perpetrated by CUE management. A. For each misstatement identified, indicate one management assertion that was violated. B. For each misstatement identified, indicate one audit procedure the auditor could have used to detect misstatement. 3. Some of the members of Cuss’s financial management team were former auditors for Ernst & Young, ALP. A. Why would a company want to hire a member of its external audit team? B. If the client has hired former auditors, would this affect the independence of the existing external auditors?
