Monday, October 17, 2005

Prof. Cherny's Principles of Auditing assignment

Prof. Cherny's Principles of Auditing students are working on group projects that deal with one of 12 audit failures described in detail in their textbook. Among the things he is suggesting, but he stressed to me, and his students today, is for them to compare, if available, the financial statements of the firms that had audit failures for several years prior to the year in which the audit failure occurred, as well, if available, financial statements of firms in the same business. He realizes that these financial statements may not be readily available for some of the firms. If they are not, he told me that he expects the students to explain information that was available that they looked at. (He said a lot of times in real life you have to make decisions on less than perfect information.)

For example, one case involves Bernard Cornfeld, also known as Bernie Cornfeld, and Investor Overseas Services (IOS), a Panama Corporation with its principal office in Geneva, Switzerland, and Fund of Funds, Ltd., a Canadian open-ended investment company (mutual fund). Ok so far? The audit failure occurred about 1969, prior to electronic filings of documents. I contacted the SEC, which uses Thomson Financial for obtaining old filings pre Edgar (basically pre-1994 for U.S. firms.). Thomson Financial hasn't gotten back to me, but if the filings are available, it is at a cost of 23 or 26 cents a page. (I will work with Prof. Cherny to see if he wants these in the future for assigments.) IOS and Funds of Funds went into bankruptcy; much money was lost; everyone sued everyone; and litigation ended in the mid 1980s. (See Westlaw and Lexis-Nexis; the case against the auditors is cited in the literature that the students have.) Cornfeld was apparently quite a character; he went to prison for several years. There are books about this fraud which we have here in the library. (I didn't check to see if any financial statements were reproduced.)

Update 10/19 on the IOS/Funds of Fund/Bernie Cornfeld case: The SEC called back and said that since this fund wasn't registered in the U.S., they wouldn't have any financial filings. I relayed this information to Prof. Cherny. Encourage students to select another case if they want to compare financial filings. Checking Thomson Research or the SEC site for Edgar documents or Hoovers would be a good place to start/

Another more recent, from the mid 1990s, audit failure is for Livent, a Canadian-based firm, publicly-traded, that produced/produces live theatre shows, both in Canada and the U.S. (It has continues to operate under bankruptcy protection. There are many stories about both of these frauds in the popular press (WSJ, NYT, Financial Times, etc, accounting journals, etc. The Canadian, which is like the SEC's Edgar, does have earlier filings for Livent, as does Thomson Research. Disney appears to be the only other publicly traded firm that produces live theatre shows, as a student and I searched by NAICS and SIC codes.)

So, where else to direct the students? CCH Business & Finance probably has some helpful information at its Securities tab. There is a selected Federal Securities Cases Archive 1941-1993 and SEC Releases and other Materials that can be searched. (The SEC Releases and other materials will give you the SEC case number and what happened --for example, in short, Cornfeld reached a settlement with the SEC.)

The new Audit Analytics database, for which one user can be on at a time, might provide some help as there is audit data back to 2000 and one can search by broad industry classifications--such as entertainment and one may also see the audit firm's opinion letters.

When I spoke with Prof. Cherny told, he told me that part of the assignment is also written and oral communication. (He worked in the profession for a number of years before returning to get his PHD.) Definitely, the case studies pose what were real life problems, and the students need to explain, to the best of their abilities, what they would conclude, based on what is available to them. I helped a student on Saturday with information on the Livent case, and she told me that, based on what the case presented, "the young auditor was in way over her head," as she didn't understand the business of financing theatre productions. The auditor unfortunately went along with what was going on....and ended up with a prison sentence.

Prof. Cherny is also looking for suggestions such as what weaknesses were apparent--for example, a lot of cash being handled only by one person, relatives-friends dealing with each other, but of course, perhaps there was nothing easily apparent, because of the nature of fraud.

Perhaps if any of these students come to the reference desk you could refer them to me. I don't know what the other 10 cases are that the students are working on. I think it is a semester project.

I think this assignment has information competency in it--for students and librarians.

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