Anthony Natelli was frustrated. For several days, Natelli had been working frantically on a 112-page proxy statement for one of his audit clients, National Student Marketing Corporation (NSMC). It was 2:00 A.M. on August 15, 1969, and Natelli was sitting in the New York City offices of Pandick Press, a financial printing firm. Natelli was waiting for the most recent version of the proxy statement to come off the presses. Three days of little sleep and constant run-ins with NSMC's executives had left Natelli's nerves frayed. Natelli, an audit partner with the Washington, D.C., office of Peat, Marwick, Mitchell \& Co., had flown to New York City three days earlier with NSMC's chief executive officer (CEO), Cortes Randell, and financial vice-president, Bernard Kurek. Randell had insisted at the last minute that Natelli and the audit supervisor on the NSMC engagement, Joseph Scansaroli, accompany him to New York on his private jet, Snoopy. Since NSMC was an important audit client, Natelli agreed to the hastily arranged trip, although he had other work piling up on his desk.

NSMC was in the final stages of closing a deal to acquire an insurance company, Interstate National Corporation. Before the deal could be finalized, the proxy statement had to be submitted to the two firms' stockholders. The proxy statement contained NSMC's financial statements for the nine-month period ending May 31, 1969, and restated financial data for NSMC's 1968 fiscal year that had ended on August 31,1968. The latter data were included in a footnote to the ninemonth financial statements.

Finally, around 3:15 A.M., the new version of the proxy statement was printed. With Randell by his side, Natelli studied the financial statements and accompanying footnotes included in the proxy statement. The key issue that concerned Natelli in the financial statements was the accounting treatment for a large "commitment" that NSMC had recently obtained from the Pontiac Division of General Motors. NSMC was a leading firm in the small but rapidly growing campus promotions industry. Through a network of 700 campus representatives, NSMC distributed promotional materials for several large companies. Among the products NSMC promoted were automobiles, airline packages for spring break vacations, mini-refrigerators, and even dating services.

When NSMC received a "commitment" from a client to carry out a promotional campaign, the company immediately recognized the majority of the gross profit on the project. Often, these so-called commitments involved no more than a tentative oral agreement made by NSMC with a prospective client. Natelli had clashed repeatedly with Randell regarding the aggressive accounting treatment applied to the commitments. Over the past year, many of NSMC's clients had canceled commitments before making any payments to NSMC. Since NSMC had no legal recourse against clients in such circumstances, the unbilled receivables previously booked by the company for these commitments had to be written off to expense.

After poring over the proxy statement, Natelli reached a decision-a decision his client would not like. Natelli told Randell that NSMC would have to remove from the proxy financial statements the revenue and unbilled receivable related to the \(\$ 1.2\) million Pontiac commitment. Natelli believed that the letter documenting that commitment left too many "outs" for Pontiac. In the past, Natelli had allowed Randell to book revenue related to similar flimsy commitments. But no more. Enough was enough.

ELIZABETH GEDRA, MEET ANTHONY NATELLI

Elizabeth Gedra was frustrated. Each day, she filed into a New York City federal courtroom and then sat there for hours being peppered with unfamiliar terms such as "prior period adjustments," "deferred tax credits," and "percentage-ofcompletion accounting method." Gedra's frustration stemmed from her doubts that she was qualified to render a decision in the criminal fraud case that she and 11 other New York City jurors were hearing. Finally, in early November 1974, during the second week of the trial, Gedra made a decision-a decision that the judge presiding over the trial would not like. Gedra told the court clerk that she wanted to be excused from the jury. In her view, it would be best for everyone involved if one of the three alternate jurors took her place. Surely, one of those individuals was better qualified to decide the fate of the two well-dressed, well-mannered, and very articulate defendants that she observed each day from her seat in the jury box. The two men, Anthony Natelli and his friend and former subordinate, Joseph Scansaroli, faced prison terms and large fines if convicted of the fraud charges pending against them.....

Questions
1. Identify quality control procedures for accounting firms that might have resulted in Peat Marwick avoiding the problems it experienced on the NSMC engagements. Do accounting firms presently employ these procedures?
2. Do you believe that Arthur Andersen had a professional or moral responsibility to inform Peat Marwick why it resigned as NSMC's audit firm? Defend your answer. (Recognize that SAS No.84, "Communications between Predecessor and Successor Auditors," was not in effect in the late 1960s.)

3. Identify the key audit risk factors that Peat Marwick faced during the 1968 NSMC audit. What measures could Peat Marwick have taken to control or minimize the audit risk posed by these factors?
4. Briefly describe the responsibilities a CPA assumes, under existing professional standards, when he or she is "associated" with unaudited financial data.
5. What factor or factors may explain why Touche Ross reached a different conclusion than Peat Marwick regarding the appropriate accounting treatment for NSMC's fixed-fee promotional projects?
6. In your opinion, did Peat Marwick satisfy its responsibilities on the 1969 comfort letter engagement? Defend your answer. Briefly describe auditors' primary responsibilities, under present professional standards, when they are retained to issue a comfort letter.
7. During the trial of Natelli and Scansaroli, several junior auditors assigned to the NSMC engagements were called to testify for the prosecution. What ethical standards are relevant for auditors in such circumstances?
8. Do you believe the criminal penalties imposed on the individuals involved in the NSMC case were fair? Why or why not?
9. The federal appeals court that reviewed the convictions of Natelli and Scansaroli noted that auditors' professional responsibilities are not necessarily defined by existing professional standards. What implication does this ruling have for practicing auditors?