Che-Chuen Yuen was born in 1948 in Shanghai during the bloody civil war that rocked China following the conclusion of World War II. After the Chinese civil war ended in 1949, Mao Zedong, the leader of the Communist forces that gained control of the country, established an authoritarian central government and renamed the nation the People's Republic of China. The new Communist government forced business owners, professionals, and other alleged counter-revolutionaries to leave the country. Che Chuen's father, a businessman, was among those banished. The elder Yuen moved his family, including his infant son, to Hong Kong, which had been a British colony since the mid-1800s. Fifteen years later, Che-Chuen immigrated to the United States, where he assumed the name Henry.
After obtaining an undergraduate degree in mathematics at the University of Wisconsin, Yuen earned a doctorate in applied mathematics at the prestigious California Institute of Technology in Pasadena, California. Yuen remained in southern California after completing his doctorate, working for 14 years as a research scientist for TRW, a large conglomerate. Because he had always been fascinated by the U.S. legal system, Yuen attended law school on a part-time basis while employed by TRW. He eventually earned a law degree from Loyola Law School near downtown Los Angeles.
While working toward his doctorate at CalTech, Henry Yuen became close friends with Daniel Kwoh, a doctoral student in the university's physics department. Like Yuen, Kwoh accepted a research position with TRW after completing his degree. In addition to having the same employer, the two friends shared a mutual interest in sports.
As a young man, Yuen had aspired to become a professional soccer player. When he failed to achieve that goal, he became a martial arts expert, specializing in wing chun, a form of martial arts involving aggressive, close-range combat. After coming to the United States, Yuen became a hardcore baseball fan-his favorite team was the Boston Red Sox. Yuen's full-time job at TRW and his evening law school classes frequently prevented him from watching Red Sox games televised live on the West Coast, so he would program his VCR to record those games. Too often, Yuen's VCR failed to record a game, leaving him frustrated and angry. In his mind, if a research scientist with a CalTech doctorate could not successfully use a VCR's recording technology, there was something wrong with the technology.
In 1988, Yuen and Kwoh teamed together to develop a simplified method for programming VCRs referred to as VCR Plus. This technology became the initial product of a small company they co-founded, Gemstar Development Corporation, which was later renamed Gemstar International Group Ltd. Gemstar produced only modest revenues during its first few years of operation, but in 1990 the company's seemingly bright future persuaded Business Week to name Yuen and Kwoh the nation's "best entrepreneurs." Five years later, the men took their company public, listing its stock on the NASDAQ stock exchange. In 1997, after a reported "falling out" between the two Gemstar founders, Kwoh left the company to become an independent venture capitalist.
Gemstar's revenues increased from $42 million in 1995, its first year as a public company, to $167 million in 1999. After incurring operating losses from 1995 through 1997, the company posted a profit of $39 million in 1998. The following year, the company's net income rose to $74 million.
A strategic initiative implemented by Yuen during the 1990s accounted for Gemstar's steadily improving operating results. That initiative involved acquiring a wide range of patents that allowed the company to gain effective control over programming and search processes vital to the broadcasting and electronic communications industries.
Gemstar generated revenues by licensing its patented technologies to companies in those industries. Yuen and his subordinates closely monitored the efforts of other companies to develop technologies similar to those for which Gemstar held a patent. When Yuen discovered a potential infringement of a Gemstar patent, he would sue the offending company. Yuen's legal background helped Gemstar prevail in most of those lawsuits.

Questions
1. Do you agree with Henry Yuen's assertion that a businessperson who is complying with all applicable laws and regulations is, by definition, behaving "ethically"? Defend your answer.
2. The newly-created Interactive Platform Sector played an important role in the business model developed by Henry Yuen for his company following the merger that established GTGI. How should a major revision of an audit client's business model impact subsequent audits of the company? What responsibility do auditors have, if any, to consider the viability of new and untested business segments created by an audit client?
3. The SEC criticized KPMG for relying on conventional "quantitative" measures in arriving at materiality judgments while ignoring important "qualitative" issues relevant to those judgments. When should auditors rely more heavily on quantitative measures than qualitative issues in making materiality judgments? When should auditors rely more heavily on qualitative issues than quantitative measures in making materiality judgments? Explain.
4. The SEC charged KPMG with "repeated audit failures" in this case. Identify general conditions, specific circumstances, and other factors that are common causes of, or, at a minimum, commonly associated with "audit failures." What quality control mechanisms can audit firms implement to minimize the likelihood of audit failures?
5. The GTGI accounting fraud took place well before the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-9, "Revenue from Contracts with Customers (Topic 606)," in May 2014. Identify the "core revenue recognition principle" discussed in that document and the five steps organizations should follow in applying that principle. Assume now that ASU No. 2014-9 was in effect during the timeframe of the GTGI accounting fraud.
Explain how GTGI's accounting for the following transactions was inconsistent with one or more of the five steps that should be invoked in applying the core revenue recognition principle: licensing agreement with Scientific-Atlanta, licensing agreement with AOL, barter transaction with Fantasy Sports, and the multiple-element transactions with Motorola and Tribune Company.