The leslie fay corporations essay

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The Leslie Fay Companies was a women’s apparel manufacturer structured on Fred Pomerantz, a former Could Army Corps uniform machine during World War II. Despite the “volatile and deeply competitive” (Knapp 34) nature of the sector, Leslie Fay grew to offer the second largest annual revenue compared to any of the other publicly owned ladies apparel manufacturers, only at the rear of Liz Claiborne. Fred Pomerantz hired Paul Polishan for any position inside the accounting section where Polishan befriended Pomerantz’s son, David.

After James Pomerantz’s loss of life in 1982, John Pomerantz became CEO and chairman from the board, he was president in the company and overseeing procedures ten years prior. Polishan was also promoted and became you can actually CFO and senior vp of finance. Although Leslie Fay’s headquarters was situated in New York City’s garment area, the accounting office was off-site in Wilkes-Barre, Pennsylvania. Polishan was known for his “strict and autocratic” (33) rule through this location, demanding much via his workers and tolerating very little.

In Polishan’s absence, the accounting business office was manage by Donald Kenia, the organization controller. Contrary to Polishan’s attitude, Kenia was meek and soft-spoken.

The women’s attire industry endured during the past due 80s and early 90s due to the “casualization” (Knapp 35) of American style as well as the economic recession. The desire for much more casual-looking clothing led to decreasing sales of dresses and also other high-end dress. The recession also induced “many buyers to reduce their discretionary expenditures, including the purchase of new clothes” (35). This was a major blow to Leslie Fay’s principal customers—department stores. When ever some of these malls filed to get bankruptcy, Leslie Fay sustained material losses. “In August 1991, David Pomerantz declared that Leslie Fay had accomplished record earnings for another quarter in the year” (36). These profits were attained despite the crippling economic situation and John Pomerantz’s old-fashioned business practices that shunned “extensive market testing” (35) and the use of personal computers. While many rivals were monetarily struggling, Leslie Fay was growing. Upon January 29, 1993, Polishan informed Pomerantz of a key financial issue; apparently Kenia had “secretively carried out” (Knapp 36) an accounting hoax for several years, overstating profits “by about $80 mil from 1990 through 1992” (33) and submitting “approximately $130 million of bogus entries” (39). Leslie Fay’s products on hand was filled with air, understating expense of goods distributed and therefore elevating the gross profit perimeter.

In addition to the forging of “inventory tags for absent products” (39) plus the fabrication of “large amounts of bogus in-transit inventory” (39), orders had been prerecorded, savings were omitted from economic statements, and expenses and liabilities at the period-end are not reported. The majority of Leslie Fay’s journal records relating to price were interfered with in a way. Donald Kenia claimed total responsibility intended for the scam, but as a result of his compliant nature and low stakes inside the company, various believed this kind of to be fake. Polishan, since CFO, “was directly responsible for the ethics of Leslie Fay’s accounting records” (Knapp 37), and since he ruled the accounting office with an flat iron fist, he was thought to include played a larger role inside the scam. Kenia lacked an evident incentive in orchestrating this large-scale fraudulence since he was not paid for based on revenue, but additional executives, including Polishan and Pomerantz, who have owned a substantial amount of shares in company stock, did advantage. They received “substantial year-end bonuses, in some cases bonuses larger than their total annual salaries, resulting from Kenia’s so-called scam” (34).

Pomerantz and Polishan claimed to have noted nothing regarding these accounting errors. After the scam was discovered, the audit committee looked into and unveiled a report that exonerated Pomerantz (40), but Kenia later confessed, against his unique testimony, that Polishan “had overseen and directed every major facet of the fraud” (42). Polishan and Kenia were convicted. In 97, Leslie Fay was ruled to spend $34 , 000, 000 in pay outs and recorded for individual bankruptcy, but the organization was able to go back to a “profitable condition” (42) before staying bought out in 2001. The role of Leslie Fay’s external auditor in the midst of this fraud naturally comes into issue. BDO Seidman had been Leslie Fay’s “audit firm because the mid-1970s and issued unqualified opinions each year on the industry�s financial statements” (Knapp 39).

After the uncovering of the fraudulence, BDO Seidman withdrew these kinds of unqualified viewpoints for 1990 and 1991. The accounting firm got on a related defense to this of Steve Pomerantz, declaring themselves since victims of deception. Leslie Fay stockholders sued BDO Seidman pertaining to reckless auditing in 1993. Leslie Fay’s financial assertions had been “replete with red flags” (40), contributing to the lawsuits. These pending legal battles led to sketchy auditor freedom, thus leading to BDO Seidman to step down as Leslie Fay’s auditor. Numerous misstatements in nearly all cost and liability line items brings about the question of whether or not the lack of satisfactory internal handles was largely responsible for the fraud of course, if the external auditor’s failing to check Leslie Fay’s interior controls triggered them to miss such problems.

Business Risk Assessment

Characteristics of the Entity

The Leslie Fay Businesses was a public firm on the New York Stock Exchange in the business of manufacturing women’s apparel. From the inception, Leslie Fay’s emphasis was about producing “moderately priced and conservative dresses for women outdated 30 through 55” (Knapp, 34). In 1982, John Pomerantz, son of Fred, started to be the company’s CEO and chief of the board following a leveraged buyout following the death of his father. The organization re-listed on the NYSE in 1986. Pomerantz, Polishan, and other organization executives held large servings of company stock, and as a result, they had a direct financial involvement in the continued financial success of Leslie Fay. Top management were also the recipients of frequent and enormous year-end bonus deals. In some cases, these kinds of bonuses had been greater than all their annual salaries.

Structurally, the organization CFO and controller, Polishan and Kenia, had significant overriding capabilities over economical data. Inner controls were severely missing, allowing administration to skew almost all ventures related to expense. Polishan “‘dominated’ Kenia through intimidation and fear” (Knapp 42), persuasive Kenia to inflate Leslie Fay’s gross margins. Before the fraud was uncovered, Leslie Fay created the second major earnings in the market, placing the business in the leaderboard.

Industry, Regulatory, & exterior factors

To comprehend the position of Leslie Fay in the late 1980s and early on 1990s, it is crucial to look at the state of the could fashion market at that time. Leslie Fay’s key competitors included Oscar de la Renta, Donna Karan, and more. However , the firm’s leading rival was Liz Claiborne,  “the just publicly possessed women’s apparel manufacturer in the late 1980s that had larger annual product sales than Leslie Fay” (Knapp 34). The firm’s main customers, that have been also distributed by their competitors, had been the large mall chains. Many industry tendencies contributed to monetary hardship. One of the most impactful of the trends was your “casualization” (Knapp 35) of America. This is a craze that acquired developed many years earlier and was in complete force by the late ’80s. Millions of buyers began to avoid the traditional symbole of ladies fashion and opted instead to wear more comfortable clothes. This movement began with younger women but then strike women inside the 30 to 55 year-old segment, Leslie Fay’s target audience. More specifically, this shift toward casual apparel significantly afflicted women’s gown sales.

In the early 1970s dress product sales began to drop as a result of the popularity of pantsuits, and by the late 1980s the move toward casualwear had completely damaged the sales of dresses. All this was not so good news for Leslie Fay. Given that they were a manufacturer of “stylishly traditional dresses, ” (Knapp 34) they were trapped in a current towards everyday clothing using a business model looking to swim upstream. The culture of deregulation in the Combined Sates that began in the early 1970s, took off in the 1980s, and flourished in the 1990s and early 2000s had an have an effect on on the financial and accounting departments of countless companies. Specifically regarding accounting, the PCAOB did not can be found until 2002. This intended the lack of a regulatory body to oversee the creation of and compliance with accounting and auditing requirements. In addition , rules did not yet require the modern, SOX-created type of the audit committee, in charge of the hiring and shooting of the exterior auditors among other things.

The CFO and CEO were not necessary to personally testify (with a signature) for the accuracy in the company’s monetary statements, giving them less accountability. The overall deficiency of accountability pertaining to CFOs and CEOs as well as the more laid-back approach that auditors required during that period of time enabled Leslie Fay’s scandal to pass through undetected for that extended. A variety of exterior factors motivated Leslie Fay. Most important was your recession of the late 1980s and early 1990s. The recession just heightened the problems in the can certainly fashion market, as buyers began to observe their spending and put in less in new garments.

There was an overall economy-wide decline in price tag spending, which hurt organization for the major department retailers that were Leslie Fay’s customers. As a result of poor retail revenue, many variety store chains had been forced to possibly merge with competitors or to liquidate. This hurt Leslie Fay as the surviving shops, with which the firm do business, “wrangled financial concessions from their suppliers” (Knapp 35). As Leslie Fay’s main customers got hits throughout the economic recession, the manufacturing organization also experienced great losses.

Internal Control

From the details presented in the case by Konzis, it is evident that Leslie Fay did not have an effective system of inner controls. Above all is the fact the firm’s accounting offices had been located 90 miles away from corporate headquarters. Being this far away from the Garment Region in New york would have achieved it difficult intended for internal and external auditors to have a total understanding of just how Leslie Fay’s business controlled since they could not physically observe it. In addition , most accounting personnel found in PA could hardly discuss concerns face-to-face with individuals in corporate and business headquarters. Paul Polishan manufactured frequent journeys to Ny, however having been ultimately responsible for orchestrating the accounting scam, and his autocratic leadership style exacerbated the matter.

Anyone who requested records had to immediately solution to Polishan, offering a reason why that they needed to understand that information. This kind of gave Polishan the feasible ability to cover information prior to anyone else may see all of them. Leslie Fay also a new lack of almost any information technology system. In an era where it had become popular in the industry to use computer sites to monitor daily product sales, the organization was still producing calls to customers on a weekly basis to record sales quantities (Knapp 35).

This managed to get easier to change sales and inventory numbers towards the end of accounting periods, especially when considering Polishan’s conviction, because a lack of THIS meant less-precise numbers. In addition , the accounting offices in PA were not up to date with contemporary data control; rather they were doing more job by hand. Lastly, the magnitude of the effect that Polishan had more than Kenia, the controller, and ultimately the entire accounting process, indicated an absence of checks and balances inside the system. Knapp states in the case that Kenia and other subordinates followed any order given by Polishan simply due to his intimidation factor. A good system of internal handles would guard against this, a vital arrangement Leslie Fay obviously lacked.

Objectives, Strategies, & Business Risks

Leslie Fay had received complaints via consumers that their clothing range was too “old-fashioned, ” “matronly, ” and “overpriced” (Knapp, 36). Given these circumstances, the firm really should have sought to revamp their very own product line and manufacture more trendy clothing while being true to the fundamental ideas regarding fashion that Leslie Fay was reputed for. Unfortunately intended for the company, Steve Pomerantz was adament on conducting business the classical way and relied about himself and his designers to forecast products. This might have worked had Pomerantz known what the overall trend in the could fashion industry was, yet he would not make use of industry testing to find out what women were actually looking for in clothing. The firm encountered many business risks during this time period period. The recession increased competition as many firms were all aimed towards the same industry segment that was spending less about new clothes.

There was also pressure to overcome Liz Claiborne as the sales leader in the industry. Leslie Fay was as well pushed to formulate trendier apparel in a changing set of consumer demands. The liquidation and mergers of department stores led to many write-offs and lack of income for the making firm. Leslie Fay was also subject to less-advantageous revenue terms required upon them by the retailers such as longer payment terms, more lax return plans, and improved financial assistance (Knapp 35).

As always, the pressure is usually on keeping costs down in the market they are really in. Simply because aimed intended for moderately priced clothing, the firm needed to drive down costs in order to make an income from their goods. The company had to retain sales and profits up all whilst factoring in these types of changes in the overall economy and in their very own specific industry. Leslie Fay faced the pressures of meeting analysts’ projections, simply because were a publicly traded business. If they did not meet up with projections, they were subject to a loss of buyer capital. Healthy financial quantities were also vital that you maintain in the interest of keeping creditors happy. The firm necessary financing by both lenders and shareholders in its common stock to back up the design and manufacture of its garments.

Entity Performance Measures

Your the economy and industry back in the 1980s and early 1990s led to decreased spending, which in turn would have converted to lower sales and earnings for most organizations in the fashion industry. Yet , as known in the case and since seen by Leslie Fay’s financials, the firm was achieving record earnings irrespective of a sluggish retail sector (Knapp 36). Some key financial proportions and findings are offered in Show 1 . An analysis of these ratios implies that, according to Leslie Fay’s doctored economical statements, they were more liquid compared to the industry common, but less solvent.

That were there lower products on hand, accounts receivable, and asset turnover percentages than the market, and the age ranges of their inventory and accounts receivable had been higher than the industry normal. Their major margin percentage was about in par with industry common, however they demonstrated a higher earnings margin on their sales (by 1 . 31%) as well as a significantly higher ROA (9. 79% higher). Their ROE was lower than the industry common. A higher income margin upon sales, together with decreased revenue from 1990 to 1991, suggests that Leslie Fay manipulated cost-side articles.

Fraud Triangular


Within consumer behavior of the women’s apparel market pressured Leslie Fay mainly because it suffered a decline in customers in the early 1970s and eighties. During this time, products were switching to become more casual, and new styles included more comfortable, well-worn apparel like skinny jeans and tee shirts. Even Leslie Fay’s target audience of women between ages of 30 and 55 were dressing more casually and purchasing less dresses. As a third of Leslie Fay’s total sales will be attributed to dresses, Leslie Fay felt the pressure with the change in the apparel industry (The Leslie Fay Firm Inc. History). It was as well affected by the economic recession of the late 1980s and early 1990s. You�re able to send major consumers, department store restaurants, experienced a decline in retail spending due to this downturn (Knapp 35).

The economic strain in department stores induced them to require financial credits from suppliers like Leslie Fay. The business was asked to allow the department stores much longer payment terms and more easygoing return plans, and to provide more economic assistance for in-store exhibits,  kiosks, and apparel shops (Knapp 35). Retailers belittled Leslie Fay of manufacturing clothes that were overpriced and old-fashioned. The company was forced to give rebates to wholesale customers that could not really sell all of the apparel that they had purchased. Pressure from stores created a place that burdened Leslie Fay with getting new ways to maintain profits.

Business compensation is another incentive to commit scam. Executives including Pomerantz and Polishan acquired substantial hobbies in the Leslie Fay Businesses as they possessed large hindrances of the company’s stock. In addition , executive bonuses were extremely generous, sometimes exceeding gross annual salaries (Knapp 34). Top rated executives in whose financial interests were intensely invested in Leslie Fay through stock title and these large additional bonuses were very likely to commit fraud for their personal benefit.


A significant part of Leslie Fay’s operations was your geographical big difference between corporate headquarters plus the accounting office buildings. Corporate hq were situated in Manhattan, as the accounting office buildings were 100 miles southwest in Wilkes-Barre, Pennsylvania. Paul Polishan dominated the Wilkes-Barre office, nicknamed “Poliworld, ” as the CFO and senior vp of financial. This physical separation involving the accounting section and other business owners and top management produced an opportunity for fraud. Finance and accounting employees are not as closely supervised because those inside the corporate hq due to this physical disconnect.

This kind of also limited the internal settings that could be implemented over the accounting department (Knapp 33). Open public accounting businesses were not but regulated by simply Sarbanes-Oxley, creating an opportunity for Leslie Fay Companies to commit Fraudulence. SOX requires that public companies get an integrated review, including a great audit of financial statements and internal settings over financial reporting (Messier 43). BDO Seidman had not been required to carry out an examine of internal controls since there was zero existing control. This means that management’s actions in relation to financial revealing were not actually being looked at by its external auditor. This lack of regulation damaged the audit procedures performed by BDO Seidman, which left the internal control system unchecked.


Paul Polishan’s taking over personality made him a strong influence over his subordinates, especially Donald Kenia. Polishan strictly ruled the Wilkes-Barre offices and when senior managers from the corporate headquarters asked him to get financial details he frequently demanded the reason they needed the information (Knapp 33). This defensiveness that ought to have been a red flag produced an environment exactly where people were not wanting to question Polishan. The relationship between Kenia and Polishan was also tightly examined throughout the investigation of Leslie Fay. Kenia claimed to have been “dominated” by simply Polishan through intimidation and fear (Knapp 42). Polishan’s daunting persona allowed him to intimidate Kenia wonderful staff into falsifying economical transactions and commit scams. Polishan’s dominance at Leslie Fay place a strain on internal controls.

Case Questions

1 . One common size “balance sheet” and profits statement, as well as key financial ratios happen to be detailed in Exhibits two through 5. Key proportions that should draw auditor interest include products on hand turnover and age of stocks, accounts receivable turnover and age of accounts receivable, low margin, and profit percentage. The low and continuously lowering inventory turnover and identical accounts receivable turnover that the ratio spreadsheet shows signifies that inventory is usually sitting intended for 85. 68 days in stock just before it is marketed, and when it can be eventually sold Leslie Fay is certainly not receiving the bad debts to all of them for 56. 33 days. While this really is to be predicted in the economic depression that the business was facing during this time period, it is significantly longer than the industry uses of 53. 7 days pertaining to inventory and 45. 5 days intended for accounts receivable.

This should bring auditor attention to the inventory and accounts receivable lines on the balance sheet, making sure they are really valued properly and completely, including appropriate allowances. With customers shopping for less and taking for a longer time to pay for this, how does the organization maintain the constant gross margin and earnings margin consistent with and exceeding beyond industry rules, respectively? This is actually the key problem that should have drawn auditor attention and where auditors really should have exercised their professional skepticism. Decreasing inventory turnover and accounts receivables turnover is to be expected in hard times the moment customers are interested less and a few are even going bankrupt, but more interest should have been focused on how Leslie Fay managed to go beyond the rest of the sector in profit margin (Leslie Fay’s a few. 5% compared to the industry typical of 2. 2%) under these conditions.

2 . In addition to the “balance sheet”, income declaration, and economic ratios, a great auditor would like to have additional key monetary information to accomplish the actual review. For the auditor to make the decision what added financial info was necessary, he would first perform a comparability similar to that in Question 1, which evaluated the risks around the financial transactions, especially in regards to industry rules. Through this analysis, the auditor might have decided that physical products on hand counts and substantive research of the inventory would be information and facts to have since Leslie Fay is a selling company whose business entirely relies on it is inventory. Throughout a recession, it could also be crucial to verify revenue and the major margin, to ensure that gross margin is actually above industry uses as the corporation claims.

The auditor should scan for significant and uncommon entries, especially at the end in the period, to ensure Leslie Fay is not just manufacturing additional inventory at the end of the period to create down the expense of goods distributed. Auditors must also confirm sales with the clients both intended for occurrence and completeness in the transactions that have been recorded. During this check it will be important to read sales contracts to ensure that revenue was identified accordingly. Finally, the auditor would need to confirm that Leslie Fay included a large enough allowance pertaining to doubtful accounts. During this period there was a economic downturn and many customers were unable to pay or perhaps were losing sight of business, an important concern intended for company.

3. When assessing a business industry, it is crucial to note the current economy and the riskiness from the industry by itself. Even before the recession strike, Leslie Fay was not big on alter; it would business with no use of very much technology or consumer checking, even inside the accounting departments. In the highly volatile style industry, how did Leslie Fay manage with constantly changing styles and tastes? They tried to foresee changing variations on their own, with no tracking of consumer tastes to help guide them (Knapp 35). Leslie Fay was taking a dangerous approach to a risky marketplace. As our economy declined, this manner industry only became even more risky. The industry was clearly in a downfall due to the recession as well as the culture’s movements away from dresses, both of which caused a decrease in just how many dresses were acquired by full customers.

Through this kind of market, it would be very important to the auditors to not simply gather non-financial information about Leslie Fay and the fashion market, but they also needs to gather info on Leslie Fay’s clients, the top department stores, to ascertain whether or not they can pay for excellent accounts receivable. This information would help identify an appropriate allocation for dubious accounts, which in turn would effect the amount of revenue recorded inside the income declaration and the accounts receivable stability on the “balance sheet”.

The down pressure on the industry would greatly raise the incentives and pressures to maintain good financials, which in turn, will increase the risk of fraud. All these factors will need to influence what kind and amount of the checks performed by auditors. Auditors should confirm purchases with customers, and inquire inside and outside the firm for how Leslie Fay goods fit in the industry. The recession of the overall economy should also boost the testing completed the sales account to ensure they actually took place to answer this question: Just how did Leslie Fay income when all the other companies available in the market were shedding revenue?

some. As mentioned before, Paul Polishan played a very dominant role in the accounting and financial departments additionally to his subordinates by Leslie Fay. When there is certainly such a dominant person at the top, especially one that offers great control over subordinates, the reliability with the financial info decreases. The commanding determine decreases the checks and balances in the company that ensure right information, which usually increases possibilities for scams. Auditors have to recognize this figure and plan appropriately to inquire about firm information by both internal and external independent options, keeping in mind that the dominant person could also endanger internal questions. The auditors must understand the respected force and try to examine the aspects that he had definite control over more deeply. The auditor should find the motivations that the major player might have and examine areas that he’d want to have changed.

For example , Polishan’s personal cash flow was greatly influenced by stock price, meaning that he would want to inflate revenue to increase the true market value. Auditors must, therefore , lower detection risk and test potentially damaged accounts more. The auditor should then take the time to thoroughly evaluate administration assertions about completeness, privileges and requirements, valuation and allocation, and existence of account bills and orders that have taken place. Overall, the auditors ought to begin to review a company with a dominant figure like Polishan with a good amount of professional skepticism, realizing that the tone at the very top decreased the interior controls and they will have to raise the amount of testing and inquiring done to get an accurate picture with the company’s financial records.

5. Freedom and objectivity are a pair of the most important external auditor attributes. The SEC ruled that BDO Seidman’s independence have been jeopardized by the lawsuits that named BDO Seidman and Leslie Fay as defendants because of the insufficient objectivity the fact that accounting organization would have in the event they performed the next year’s external taxation. Because the shareholders’ lawsuit against them set BDO Seidman and Leslie Fay on a single side, BDO Seidman today had a personal stake in Leslie Fay’s financial assertions and was no longer independent of the firm’s financials. If BDO Seidman were to perform the audit, the shareholders would not be able to depend on or trust the financial statements; they can assume that BDO Seidman could alter the auditing process for their benefit.

The lawsuit was not the only thing of inconsistant interest among BDO Seidman and Leslie Fay. GAAS #2 claims that an external auditor should be independent in the form of thinking. Following your fraud was revealed, BDO Seidman retracted two untrained opinions for the past two years and publicly explained that they had been victims in the Leslie Fay fraud, blaming Leslie Fay’s upper management for the entire structure. This pin the consequence on game backwards and forwards between Leslie Fay and BDO Seidman clearly removes any likelihood for auditors to go in a Leslie Fay audit with an independent way of thinking.

Additional Inquiries

1 . The fraud could have been even more detectable to the external auditors had SOX been executed at that time. Howard Schilit, a forensic accounting specialist, “suggested…that Leslie Fay’s financial info had been crammed with reddish flags” (Knapp 40), demonstrating that enough problems were show justify additional scrutiny. Among the largest components of SOX is a investigation of internal handles. Such an research would have helped the external auditors recognize that the information these were given was not fully trustworthy. BDO Seidman should have evaluated the lasts Leslie Fay’s system, ensuring that neither Donald Kenia, the controller, neither Paul Polishan, the CFO and older vice president of finance, could actually tamper while using financial data without regulation.

The lack of any sort of IT system due to the CEO’s particular cast to “old-fashioned” (Knapp 35) tradition likewise gave good luck to exec management—they experienced absolute control over the economical data devoid of electronic evidence of tampering. The numerous red flags referred to by Schilit make that apparent that BDO weren’t getting professional skepticism in this case, leading to the unqualified audit reports for Leslie Fay’s economical statements.

installment payments on your The proper delivery of examine tests may have enabled BDO Seidman to uncover the accounting problems. Inquiry of Leslie Fay personnel might have quickly indicated that Polishan had absolute control over the financial info, causing the auditor to then evaluation internal handles. An observational inspection from the application of inside controls needs to have been administered so BDO Seidman can see what checks Leslie Fay experienced in place to regulate their monetary data. In the event this was effectively observed, executive management’s control of the scams may have been exposed. Many hypostatic procedures could have been implemented to increase uncover problems. A evaluation of details would have shown errors out of all major line items relating to cost and liabilities. Substantive tests of individual deals, such as with purchase accounts, could present that the inventory reportedly in-transit did not truly exist.

A walkthrough and inspection of documents and activities could reveal much of the products on hand reported was falsely documented because there will be no organic process in which actual inventory entered the warehouse and was recorded—since they were fabricated, the observer would have known this important step. A test of account balances would also display that the inventory on hand did not match up towards the reported amounts. Substantive conditional procedures are key in this situatio. Due to poor economic situations and rival struggles, a red flag must have been elevated when Leslie Fay extended to survey earnings progress but failed to explain how.

Since additional bonuses were linked with earnings, professionals had bonus to inflate their figures. Pomerantz’s “total salary and bonuses of “3. 6th million [was] three times more than the 1991 settlement of Liz Claiborne’s CEO, whose business reported product sales more than dual those of Leslie Fay’s” (Knapp 40). BDO should have in comparison Leslie Fay to others in the could apparel industry, noting differences in trend lines. The gargantuan bonuses may have mentioned that company operations are not management’s largest concern.

Bottom line

The accounting fraud built by Paul Polishan, CFO and SVP of financial at Leslie Fay, certainly tarnished the reputation of Leslie Fay as well as its management, as well as BDO Seidman as its auditor. Many elements ultimately written for the $80 million accounting hoax that was finally uncovered inside the early 1990s. One of the major factors included a severe lack of internal handles. No worker would match the domineering Polishan, particularly the second-in-command at your workplace, Donald Kenia, the control mechanism. In addition , when an employee or perhaps management on the corporate head office would request financial information from Polishan, he would query them regarding why they will needed the knowledge, which should have already been a sign that perhaps some thing illegal was happening backstage. Not only was there a huge communication problem between the business owners of the firm, but as well the lack of transparency between business owners was astonishing, as other executives were in the dark about the fraud. Leslie Fay’s extended success within a struggling ladies fashion market should have started BDO Seidman to seem more closely into the financial information provided by Polishan, and perhaps conduct substantive analytical types of procedures on a more in depth level.

BDO Seidman also should have positively compared Leslie Fay to its close competitors, as well as the industry in general, to see that key monetary ratios would not match the overall trend. The opportunity and bonuses for Paul Polishan to commit fraudulence were both present. The physical distance of Polishan from headquarters made available a large opportunity for him to commit scam. In addition , he had an employee willing to take the discover him if the fraud was uncovered. With this prospect, Polishan was able to evade bad financial claims that the declining women’s vogue industry could have given him and maximize his reward, which was tied up directly to the earnings of Leslie Fay. Acquired the Sarbanes-Oxley (SOX) guidelines been integrated prior to the accounting scandal at Leslie Fay, the fraud would have recently been more easily detectable. SOX may have held business owners accountable for the accuracy of financial statements The external auditor would also have been organised to a higher standard of offering reasonable assurance as to the accuracy and reliability of the business financial assertions.

Even though BDO Seidman simply provided an “unqualified opinion” on the accuracy of the assertions, SOX might have prevented BDO Seidman coming from being so careless in their auditing of Leslie Fay. Lastly, SOX would have required an specific review of inner controls, which Leslie Fay was lacking. The lack of internal controls in Leslie Fay, and BDO Seidman’s ignorance of this issue, was a significant contribution towards the fraudulent accounting scheme that took place. If the external auditor, BDO Seidman, had performed a proper overview of Leslie Fay’s internal controls, they would include uncovered a total lack of stated controls, together with a lack of checks and balances between leading management. This kind of deficiency triggered a major detachment between the CFO and other organization executives, while using critical trouble being data asymmetry between the two get-togethers.

The accounting offices of Leslie Fay were located a hundred miles from the corporate headquarters, enriching the gap between the CFO and other best management, rather than allowing the accounting crew to literally see the procedures of the firm. Additionally , Leslie Fay was missing any type of information technology system, and instead tracked daily sales and inventory matters by hand. This kind of allowed for simpler manipulation of data linked to the revenue process of the organization. As found through the scenario at Leslie Fay, solid internal settings, and the dangerous these settings, is essential for the uncovering and prevention of fraud inside any company. The potency of the internal regulates should be tested by the exterior auditor, and periodically examined by executives of the business.


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