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Cardillo Travel Systems
Transcript of Cardillo Travel Systems
Stephen Lipetzky Purchased in 1956 by Arnold Walter Rognlien Founded in 1935 Ranked as the 4th largest in the travel agency industry
First travel company to be listed on a national exchange
Annual revenue growth since 1956, approaching 100 million in 1984 Powerhouse Esther Lawrence
44 years old
long time employee New COO Position:Controller Russel Smith In charge of making sure the books Followed the SEC standards for Financial reporting 1982-1984 Posted collective losses of 1.5 million dollars
Due to agressive franchising strategy. Doubled the number of travel agency franchises operated by Cardillo Raymond Riley Attorney requested smith sign an affidavit regarding a $203,000 payment by United airlines.
No clear diclosure of why payment was being made or purpose the funds would be used for.
The affidavit included an indication that stockholders equity exceeded 3 million
Smith knew this was false and Cardillo was involved in a lawsuit that mandated that stockholders equity be at least at 3 million
Smith refused to sign due to blantant misrepresentation Affidavit Helen Shepherd audit partner supervising the 1985 audit
Discovered the information regarding the payment.
Revenue not recongnizable until 1990
Rognlien terminated Touche Ross Touche Ross Cardillo indicated no disagreements preceding in the decision to dismiss Touche Ross
Touche Ross discussed the disagreement in the accounting treatment of the $203,000 payment 8-k Statement Discovered the Misstatements
Told Rognliem that the payment would have to recognized as revenue over the stated five years
Cardillo began to experience severe liquidity problems
Kmg resigned independent audit firm KMG Forced into involuntary bankruptcy
SEC found Rognlien, Lawrence and Kaye had violated federal securities laws 1987 Fraud
SEC Key Issues Russell Smith
Subordinates Identify the accountants in this case who faced ethical dilemmas. Also identify the parties who would be potentially affected by the outcome of each of these dilemmas. What responsibility did the accountant in each case owe to these parties? Did the accountants fulfill these responsibilities?
Procedures Describe the procedures an auditor should perform during a review of a client’s quarterly financial statements. Yes Should the auditors have immediately informed the audit partner, Helen Shepherd, of the entry? No, didnt asked enough questions In your opinion, did the Touche Ross auditors who discovered the $203,000 adjusting entry during their 1985 second-quarter review take all appropriate steps to corroborate that entry? In reviewing the United Airlines-Cardillo agreement, Shepherd collected evidence that supported the $203,000 adjusting entry as booked and evidence that suggested the entry was recorded improperly. Identify each of these items of evidence. What characteristics of audit evidence do the profession’s technical standards suggest auditors should consider? Analyze the audit evidence that Shepherd collected regarding the disputed entry in terms of those characteristics. Journal entry came from an agreement between Rognlein and United Airline
Multiple Sources What are the principal objectives of the SEC’s rules that require Form 8-K statements to be filed when public companies change auditors? Did Shepherd violate the client confidentiality rule when she discussed the United Airlines-Cardillo transaction in the exhibit letter she filed with Cardillo’s 8-K auditor change statement? In your opinion, did Shepherd have a responsibility to disclose to Cardillo executives the information she intended to include in the exhibit letter? SEC's rules 8-k statements
No violation in client confidentiality rule Do the profession’s technical standards explicitly require auditors to evaluate the integrity of a prospective client’s key executives? Identify the specific measures auditors can use to assess the integrity of a prospective client’s executives. When beginning an engagement the auditors should exmaine the ethics of a company.
Measures auditors can use
Past filings Any Questions Thank You