In 1937, Otto Bayer, a research scientist for the large German chemical company IG Farben, discovered a new chemical compound that would become known as polyurethane.

During World War II, polyurethane was used principally in the manufacture of military equipment and supplies. Following the war, IG Farben was dismantled by the Allied Forces as punishment for its collaboration with the Nazis. Certain of the company’s products had been used by the Nazis to perpetrate unconscionable atrocities on innocent civilians.

During the latter one-half of the twentieth century, polyurethane was used in the manufacture of a wide range of consumer goods, including automotive trims and moldings, batteries, carpet padding, and diapers. Among the most important polyurethane derivatives was a compound initially referred to as “imitation Swiss cheese.”

Polyurethane foam was “invented” in a research laboratory in the early 1950s when water was accidentally added during the production process for polyurethane.

One of the initial manufacturers of polyurethane foam was the Firestone Tire and Rubber Company. The Firestone division that produced the product would eventually become a freestanding company, Foamex International, Inc. Foamex became the United States’ largest producer of polyurethane foam due to an ambitious acquisition program initiated by the company’s management during the 1980s. By 2001, Foamex owned and operated more than 50 manufacturing and distributing facilities in the United States, Canada, and Mexico.

An unanticipated by-product of Foamex’s acquisition program was a chaotic accounting system. The companies acquired by Foamex continued to use the accounting systems that they had previously employed. As a result, by the year 2000, Foamex’s corporate accounting system was an amalgamation of dozens of geographically dispersed “legacy” systems that relied on a haphazard assortment of computer hardware and software components.

Foamex’s failure to develop a coherent, integrated corporate accounting system complicated the annual audits of the company. In August 1999, PricewaterhouseCoopers

(PwC), Foamex’s independent audit firm, notified the company’s audit committee that Foamex needed to improve its internal controls. “The auditor reported that Foamex’s systems for the preparation of interim financial information did not provide an adequate basis for the auditor to complete, prior to certain filing deadlines, its reviews of Foamex’s interim financial statements.”1 In May 2000, following the completion of the 1999 Foamex audit–the company’s fiscal year coincided with the calendar year–PwC issued a “Report to Management.” This report identified several serious internal control problems or “reportable conditions” and recommended that Foamex take the following specific actions to remedy these problems............

Questions:-

1. Who has the final responsibility for the integrity of an SEC registrant’s internal controls: its audit committee, its management team, or its independent auditors?
Explain.
2. Under the professional standards currently in effect, what responsibility do auditors have to identify internal control problems within their clients’
accounting systems? To whom must auditors communicate such problems? In responding to these questions, indicate how auditors’ responsibilities differ, if at all, between public and nonpublic clients.
3. Under what conditions is a public company allowed to dismiss its independent audit firm? Under what conditions is an independent audit firm allowed to resign as the auditor of a public company? What disclosures, if any, does the SEC mandate when a public company experiences a change in its independent auditors?
4. Should the SEC selectively prosecute companies, organizations, or individuals to encourage compliance with legal or professional standards? Defend your answer.