1. Arthur Andersen dan beberapa pegawainya menjadi terdakwa baik perdata maupun pidana atas keterlibatan mereka dalam kasus Four Seasons. Coba bandingkan dan bedakan tingkat kepastian (bukti) sehingga membuat penggugat harus menetapkan tuntutan perdata dan pidana tersebut.

2. Identifikasi kasus pengadilan lainnya yang melibatkan perusahaan audit dimana auditor independen menghadapi tuntutan pidana! Apa hasil akhirnya pada masing-masing kasus?

3. Tanggung jawab apa yang dimiliki partner kantor atas kinerja dari bawahannya? Tanggung jawab apa yang harus dimiliki oleh auditor senior ketika perjanjian dilakukan oleh audit junior?

4. SAS No. 31, "Evidence Matter," mengidentifikasi lima kunci dari asersi manajemen yang mendasari serangkaian laporan keuangan. Manakah dari pernyataan ini yang dilanggar dalam kasus Four Seasons?

5. Four season menggunakan kedua metode yaitu fisik dan biaya untuk jangka panjang. Mana, dari salah satu metode ini yang baiknya digunakan Four season? Jelaskan mengapa !

6. Jika pada tahun 1972 Arthur Young menemukan hasil temuan audit pada Philips Petroleum terkait kontribusi kampanye ilegal yang dilakukan pada pemilihan ulang Presiden Nixon pada tahun 1972. Bagaimana temuan ini mempengaruhi hasil auditnya?

CASE 2.10 FOUR SEASONS NURSING CENTERS OF AMERICA, INC. On February 7, 1974, Kenneth Wahrman, an audit partner with Arthur Andersen, was sitting in an Oklahoma City federal courthouse. After a ten-week trial, Wahrman was awaiting a jury's verdicta verdict that could mean he would spend the next five years of his life in a federal prison. Wahrman and two other Arthur Andersen employees had been indicted on criminal fraud and conspiracy charges. These charges stemmed from Arthur Andersen's audits of Four Seasons Nursing Centers of America, Inc., a company's whose bankruptcy cost investors and creditors an estimated $200 million. U.S. Attorney Gary Naftalis, the federal prosecutor in the Wahrman trial, alleged that Wahrman and his two subordinates conspired with Four Seasons' executives to conceal material misrepresentations in the company's audited financial statements. Naftalis had previously obtained guilty pleas on similar charges from four other defendants in the Four Seasons case, two officers of Four Seasons and two individuals who served as the company's investment bankers. THE SHORT AND TROUBLED HISTORY OF FOUR SEASONS Four Seasons Nursing Centers of America was incorporated in 1967. The two principal founders of the firm, Jack Clark and his half-brother, Tom Gray, perceived a tremendous need for high-quality extended care for the elderly in the United States. At that time, the nursing home industry was a disorganized amalgamation of mom-and-pop operations. The typical nursing home of the mid1960s was a converted motel or bowling alley that was operated by individuals with little or no medical training. Clark and Gray developed a prototype nursing home design with a physical layout in the shape of the letter X. This layout allowed nursing personnel in a central station to monitor all four corridors of the nursing home simultaneously. Clark and Gray's prototype design, which included other innovative features, was quickly recognized within the medical 202 SECTION TWO AUDITS OF HIGH-RISK ACCOUNTS AND INTERNAL CONTROL ISSUES profession as a significant step forward in providing humane and cost-efficient extended care for the nation's elderly. Four Seasons built and operated several nursing homes, but its officers were most interested in building the homes and then selling them to investors. Initially, physicians were the primary group toward which Four Seasons' executives directed their marketing efforts. Clark traveled from city to city in the Southwest and made his sales pitch to small groups of doctors. Although this approach was successful, it did not allow Four Seasons to expand rapidly as its officers wanted. In 1968, the company's executives and investment bankers devised a strategy to significantly expand Four Seasons' operations. This strategy involved establishing an independent company that would buy the nursing homes from Four Seasons and then either operate them or sell them to other parties. This private company, Four Seasons Equity (FSF), was organized in November 1968 and capitalized with $20 million invested principally by insurance companies.' The first public offering of Four Seasons stock was for approximately $10 per share in May 1968. By the fall of 1969, the stock had rocketed to $100 per share on the strength of the company's robust financial performance reported in its audited financial statements filed with the Securities and Exchange Commission (SEC). Also contributing to the surge in the market price of Four Seasons stock were the glowing profit and growth projections that Clark made for the company in speeches and news releases. In 1969, Clark declared that Four Seasons was well on its way to becoming the largest corporation in the world, a prediction that seemed reasonable given the meteoric growth rates for the company's assets and revenues. Unfortunately for Four Seasons' investors, the company's impressive financial data were largely a product of creative accounting gimmicks employed by Clark and his subordinates. The primary means Four Seasons' management used to inflate their company's net income was to misapply the percentage-of-completion method in accounting for nursing homes under construction. Initially, Four Seasons used the physical percentage-of-completion method to determine the amount of profit to recognize on nursing homes under construction at the end of a fiscal year. For instance, Four Seasons would recognize 20 percent of the profit on a project that was 20 percent complete at the end of a given yearassuming the project was also begun during that year. In 1969, the company switched to the cost-to-cost percentage-of-completion method. Under this method, the percentage of profit recognized on a long-term construction contract in a given period is equal to the proportion of the total expected costs for the project incurred during that period. For example, if 80 percent of the total expected costs for a project are incurred in a given year. the same portion of the total expected profit for the project should be recognized that year. U.S. Attorney Naftalis insisted that the switch in accounting methods was made because Four Seasons' management realized that the company's 1969 profit would be less than expected. By switching to the cost-to-cost percentage-of- I. Bill P. Jennings was one of several Oklahoma City bankers who funneled cash into Four Seasons. Although never formally charged, he was named in the federal indictment in the Four Seasons' case as a co-conspirator. Years later, a small Oklahoma City bank Jennings owned, Penn Square Bank (see Case 1.7), triggered a national banking crisis and became the focus of a congressional investigation for its funding of speculative oil and gas ventures and its shoddy accounting practices. CASE 2.10 FOUR SEASONS NURSING CENTERS OF AMERICA, INC. completion method, management could manipulate the profit recognized in a given year by distorting the expenditures incurred on construction projects in process.2 During the criminal trial of Wahrman and his subordinates, Naftalis proved that Four Seasons included huge amounts of fictitious construction expenditures in its cost reports for 1969, which resulted in illicit profits being reported in that year. Naftalis charged that Arthur Andersen auditors were aware that these costs were false, and that the auditors were thus a party to the conspiracy to defraud individuals relying on Four Seasons' financial statements. Attorneys for Wahrman and his associates disputed this contention by submitting as evidence copies of audit workpapers for the Four Seasons' engagement. These workpapers indicated that on several occasions the auditors challenged fictitious costs they discovered and persuaded the client to make the proper financial statement adjustments for those costs. Four Seasons also misrepresented its financial results by including de facto intercompany sales transactions in its income statement. Naftalis established that from 1968 to 1970, Four Seasons controlled the operations of its principal customer, FSE. In Jack Clark's guilty plea that he conspired to violate federal securities laws, he admitted that major decisions made by FSE's management were dictated by key executives of Four Seasons. In reality, Four Seasons was selling nursing homes to itself, meaning that the gains on these transactions were nonreportable intercompany revenues. During the Wahrman trial, Naftalis attempted to prove that the Arthur Andersen auditors were aware of the bogus nature of these sales transactions. FOUR SEASONS COLLAPSES The Four Seasons scam came to an abrupt end in 1970. Industry insiders had alleged repeatedly that Clark's profit projections for his ventures were grossly overstated. These allegations were substantiated in early 1970 by security analysts who obtained reliable cost and revenue data for several of Four Seasons' nursing homes. The revelation that nursing homes, even the modern, cost-efficient ones built by Four Seasons, were low-profit-margin operations quickly stemmed the public's and bankers' enthusiasm for Four Seasons. As a result, the company was soon left without a source of new investment capital or a market for its nursing homes under construction. Four Seasons' collapse in June 1970 caused a sudden change in the public's perception of Jack Clark and Tom Gray. Once hailed as successful and forwardlooking entrepreneurs, they were castigated by the press as unscrupulous opportunists. Investigations of their backgrounds revealed that neither had the requisite training or skills to oversee a multimillion-dollar operation. In fact, it was discovered that only a few years before founding Four Seasons, Clark had 2. Ironically, the SEC was at least partially responsible for Four Seasons' switch to the cost-tocost version of the percentage-of-completion method. Prior to the switch, the SEC had complained to company officials that they were overestimating the physical state of completion of construction projects and, as a result, recognizing excessive amounts of profit during the early years of those projects. 203 Z04 SECTION TWO AUbITS OF HIGH-RISK ACCOUNTS AND INTERNAL CONTROL ISSUES worked as a milkman in Oklahoma City, and Gray had operated a small motel in Henrietta, Texas. Judge Luther Bohanon, the federal magistrate who presided over the trial of Wahrman and his associates, concluded that Four Seasons was simply an elaborate stock manipulation scheme designed to enrich Four Seasons' officers. Clark alone earned more than $10 million in capital gains on the sale of Four Seasons stock during the short time it was publicly traded. The evidence that most clearly supported Judge Bohanon's conclusion was an intercompany memo found in records subpoenaed by the court, a memo which was written by a Four Seasons executive: \"Let's get Walston's [one of Four Seasons' investment bankers] opinion as to when we could sell a sizable portion of our stock, while the stock is at a good price, to guard against having to sell after the public realizes that nursing homes will not meet [profit] expectations.\"3 After reading this memo, Judge Bohanon remarked that the Four Seasons scandal would damage the investing public's confidence in the credibility of the securities markets for many years to come. FOUR SEASONS: A COSTLY SCANDAL FOR ARTHUR ANDERSEN On February 7, 1974, Kenneth Wahrman's two subordinates were found innocent of fraud and conspiracy charges; however, a hung jury caused the judge to declare a mistrial on the charges against Wahrman. Nine months later, Judge Bohanon dismissed the indictment against Wahrman on the advice of a federal prosecutor. Although no Arthur Andersen employees or partners were convicted in the Four Seasons' case, the lengthy scandal exacted a heavy price on the prominent CPA firm. Public records disclosed that the federal government spent more than $1 million prosecuting the threeArthur Andersen auditors. Arthur Andersen reportedly spent several times that amount defending Wahrman and his two subordinates.4 The heaviest cost imposed on Arthur Andersen by the Four Seasons scandal was the damage inflicted on the CPA firm's reputation. Arthur Andersen officials were particularly disturbed by their firm being named a co-conspirator in the Four Seasons federal indictmentno charges were ever filed against the firm. The managing partner of Andersen's Oklahoma City office at the time was also named as a co-conspirator, although he was not involved in the Four Seasons audit. This individual was named a co-conspirator on the grounds that he was responsible for the supervision and ultimately the professional conduct of his subordinates. Andersen's national managing partner charged that the Justice Department had purposefully used the Four Seasons case to send a warning signal to auditors nationwide. That warning was that auditors could be held criminally liable when clients release materially misstated financial statements. 3. R. Tempest, \"Giant Fraud Probe Set,\" Oklahoma Journal, 29 February 1972, 66. 4. Arthur Andersen was also a defendant in a large civil suit filed by Four Seasons' stockholders. The defendants in that case collectively agreed to pay $~O.6 million to the plaintiffs, although the portion of the settlement paid by each defendlant was not publicly disclosed. CASE 2.10 FOUR SEASONS NURSING CENTERS 0F AMERICA, INC. QUESTIONS 1. Arthur Andersen and certain of its personnel were defendants in both civil and criminal lawsuits for their involvement in the Four Seasons case. Compare and contrast the level of proof (certainty) that a plaintiff must establish in a civil suit versus a criminal suit. 2. Identify other litigation cases involving audit firms in which individual auditors faced criminal charges. What was the eventual outcome in each of those cases? 3. What responsibility does an office managing partner have for the performance of his or her subordinates? What responsibility does an audit senior have for the professional conduct of his or her subordinates on an engagement? 4. SAS No. 31, \"Evidential Matter,\" identifies five key management assertions that underlie a set of financial statements. Which of these assertions was violated in the Four Seasons case? 5. Four Seasons used both the physical and cost-to-cost variations of the percentageof-completion method of accounting for long-term construction contracts. Which, if either, of these two variations of the percentage-of-completion method is preferable? Why? 205 Week 5 Case Study: Case 5.5 Phillips Petroleum Company Name For Class School Professor October 5, 2016 Week 5 Case Study: Case 5.5 Phillips Petroleum Company Case Summary: Bill Grant, a Big Eight auditor and a graduate of Harvard Business School; served as the managing partner of the Tulsa office of Arthur & Young, the auditing firm for Phillips Petroleum Company. Under Bill Grants guidance the petroleum company was subpoenaed by a federal grand jury to present prepared audit workpapers. Grant respectfully denied the judge's request and was cited for civil contempt, handcuffed and sent to jail. The federal grand jury's interest stemmed from an ongoing investigation at Phillips. The Feds were investigating the company for possible tax fraud associated with a secret multi-million-dollar fund used by executives to make political contributions. One specific contribution made from the secret fund was an illegal $100,000 donation to the Committee to Reelect the President during the Watergate era. Archibald Cox the chairman at the time admitted to the illegal donation and pleaded guilty to one misdemeanor. Following the plea bargain agreement, a seven-count indictment was filed against Phillips that charged the company with filing false federal tax returns and for failing to report interest. Although Arthur Young eventually responded to the grand jury with 12,000 pages of Phillips audit work papers, key items of interest were not included. The grand jury was specifically interested in certain tax accruals made by Phillips and attorney letters obtained from Phillip's law firms. The federal grand jury believed that the items not included might provide important insight on the allegations involving Phillips. Arthur Young refused to provide the contested workpapers to the grand jury on the basis of protecting confidential information included in the audit. Eventually Arthur Young and the judge of the grand jury reached an agreement to provide copies of the requested tax accrual workpapers. All matters other than those specifically identified by the subpoena were masked to retain confidentiality. Unfortunately, the Judge was adamant on reviewing the attorney's letters and ordered Arthur Young to provide copies of those letters to the grand jury. Phillips filed a motion to appeal this order, but the appeal was denied. Do you believe the Bill Grant was justified in refusing to provide the requested work papers to the grand jury? Explain. The CPAs refusal to provide the requested audit workpapers to the federal and grand jury was reasonable as an effort to maintain client confidentiality. Moreover, professional standards allow for auditors to disclose confidential client information concerning legal actions (Ehrlich & Williams, 2011). The subpoena presented in this case was a general subpoena commonly recognized as an obligation; Additionally, a firm can take further actions to minimize its risk when complying with the subpoena. First and foremost, the CPA firm should consult with its attorney and liability insurer before contacting the client or responding, and it is critical that the firm understands the limitations and ramifications of sharing confidential information. Secondly, the CPA firm should consult with its client before responding to the subpoena. The client will commonly request certain limitations to the scope of the document request; it is reasonable for the firm to review the limitations with its in-house counsel. Lastly, the firm should obtain written consent from the client and any other parties included in the subpoena. What responsibility, if any, does a public accounting firm have to its partners and employees when they are subpoenaed to testify regarding a client? Corporations face unprecedented pressure to make disclosures to their independent auditors in the current regulatory environment, and they risk waiving well-established protections as they respond to requests for otherwise privileged information (Reach, 2012). When a partner or employee at an accounting firm is subpoenaed regarding a work related issue as a current or former employee, the accounting firm has a reasonable responsibility to provide corporate counsel in support of the client. Additionally, the firm should recommend that the client may want to retain separate legal representation. In some circumstances, the firm may be willing to reimburse the employee. It is the responsibility of the accounting firm to inform the client of the subpoena and the firm's procedures, policies and responsibilities for responding to subpoenas concerning current and former clients. What is the purpose of \"attorney's letters\" obtained during the course of an audit? If attorneys are aware that these letters can be routinely subpoenaed, how does this fact likely affect the quality of the audit evidence yielded by these letters? An attorney's letter is sent by the auditing firm to a client's counsel. It informs the auditor of any current or pending litigation involving the client. It also serves as verification for information about litigation involving management. Attorney letters almost always constitute a subpoena; fortunately, there are provisions designed to protect attorney client privilege. According to AU 9337, the attorney may respond with a very generalized statement to protect the client. If an attorney believes that the specific request from the auditors would violate attorneyclient-privilege, that attorney may send a response to auditors indicating that it believes that such information is covered by attorney-client privilege (Louwers et al., 2012). Although this situation may create a limitation on documentation, it is the responsibility of the attorney to have considered the possibility and potential impact of a scope limitation on the audit process and opinion. Do you believe the documentation included in tax accrual and audit work papers is likely affected by the auditors' knowledge that those work papers can be obtained by the IRS? Explain. According to Bez-Daz and Alam, descriptive statistics show that firms are increasingly using more income-decreasing tax accruals than income-increasing book accruals contributing to the growing divergence between tax and book earnings (Bez-Daz & Alam, 2013). Auditors are usually aware that audit work papers regarding tax matters can be obtained by the IRS. All public companies are required to file annual reports with regulating agencies such as the SEC and the IRS. The auditor has a professional responsibility to act in the public interest according to professional and moral standards. Principal moral standards such as integrity and honesty should compel auditors to provide the highest level of accuracy in their documentation. Furthermore, it is unlikely that the auditor would alter its workpapers to avoid IRS scrutiny as such an action would expose the auditor to potential litigation. As professionals, we must strive to uphold personal and spiritual integrity throughout everything that we do. In Proverbs 28:6 Gods Word reminds us, "better is a poor man who walks in his integrity than a rich man who is crooked in his ways." Having a clear conscience and strong moral foundation will allow us as auditors to provide superior service backed by Christian principals. References: Ehrlich, C. P., & Williams, J. D. (2011). The Accountant as Whistleblower. CPA Journal, 81(11), 66-71. Reach, D. M. (2012). Keep your friends close but your auditors closer: corporations risk waiver when independent auditors request work product. University Of Florida Journal Of Law & Public Policy, 2329. Bez-Daz, A., & Alam, P. (2013). Tax conformity of earnings and the pricing of accruals. Review Of Quantitative Finance & Accounting, 40(3), 509-538. doi:10.1007/s11156-0120275-2 Louwers, T.J., Ramsay, R.J., Sinason, D., Strawser, J.R. and Thibodeau, J.C. (2012) Auditing and assurance services. Edited by Brent Gordon. 5th edn. New York, NY: McGraw-Hill Higher Education. Running head: FOUR SEASONS NURSING CENTERS OF AMERICA, INC. CASE Four Seasons Nursing Centers of America, Inc. Case Student's Name Institution Affiliation 1 FOUR SEASONS NURSING CENTERS OF AMERICA, INC. CASE 2 Four Seasons Nursing Centers of America, Inc. Case Arthur Andersen and certain of its personnel were defendants in both civil and criminal lawsuits for their involvement in the Four Seasons case. Compare and contrast the level of proof (certainty) that a plaintiff must establish in a civil suit versus a criminal suit. There are various factors that are developed from particular set of conditions that include the potential consequence of a case on the plaintiff and minimization of expected error costs. The difference in standards of proof in civil and criminal cases can be deduced and explained from the normative decision theory: it is often considered a graver mistake to wrongly convict an innocent person than erroneously exonerating or acquitting one who is guilty. As such, civil cases standard of proof is the preponderance of the evidence while in criminal cases is the proof beyond reasonable doubt (Teacher, 2013). The stated standard used in criminal cases is outright higher than the one used in civil cases. In the Four Seasons case, the judges acquitted the two subordinates of Kenneth Wahrman and declared a mistrial on his case. (Schweizer, (2013) None of the Arthur Andersen associates or employees was convict for that matter. This is so because of the evidences did not proof beyond doubt that they were guilty of the charges brought against them. What responsibility does an office managing partner have for the performance of his or her subordinates? What responsibility does an audit senior have for the professional conduct of his or her subordinates on an engagement? Normally, employer-employee relationship does not necessarily create an agency relationship between them. In case of employee misconduct while working under a senior within the business premises, the employer may not be held responsible for such actions. On the contrary, such employees can be convicted independently for their actions. The employer can be convicted as well only if there is an evidence of knowledge of the misconduct and failure to take FOUR SEASONS NURSING CENTERS OF AMERICA, INC. CASE 3 action, or active participation in the employee misconduct. The same applies to the auditors where senior auditors have a responsibility to provide the best working conditions for their subordinates, but are not liable for any of their illegal actions. SAS No. 31, \"Evidential Matter,\" identifies five key management assertions that underlie a set of financial statements. Which of these assertions was violated in the Four Seasons case? Four Seasons Nursing Centers of America violated the presentation and disclosure assertions in their presentation of their financial statements. First, the incomes or revenues reported for their ongoing projects were inflated, which violates the first tenet of accuracy under this assertion. Second, the tenet of completeness was also violated because a majority of the transactions disclosed by the firm did not actually exist, at least not in reality. As it was found in the case, the company literally bought its own assets at an inflated price to increase the valuation of their companies and shares in the SEC. Lastly, the tenet of understandability was also violated since a majority of reports in their financial statements seem vague and needed clarification. Arthur Andersen provided an evidence of inquiry made to the company on certain inconsistent and erroneous reports in their financial statement (What are management assertions in auditing? Questions & Answers - AccountingTools. (n.d.)) Four Seasons used both the physical and cost-to-cost variations of the percentage ofcompletion method of accounting for long-term construction contracts. Which, if either, of these two variations of the percentage-of-completion method is preferable? Why? Cost-to-cost variations method is more preferable especially for persons who want to acknowledge the possible maximum proportion of the revenues of a project during its initial stages. Normally, the initial costs are the highest since it involves incurring of direct material costs. In this way, the company can rate the viability of the project at its worst position or period. If the project at this point is considered viable, the company is rest assured that the rest of the project will also be feasible and the revenues will or can only increase. However, the method FOUR SEASONS NURSING CENTERS OF AMERICA, INC. CASE requires regular reviews and revisions by the project accountant to ensure that it produces the correct results (Cost to Cost Method - AccountingTools. (n.d.)). 4 FOUR SEASONS NURSING CENTERS OF AMERICA, INC. CASE 5 References Cost to Cost Method - AccountingTools. (n.d.). Retrieved from http://www.accountingtools.com/cost-to-cost-method Schweizer, M. (2013). The civil standard of proof - what is it, actually? Max Planck Institute for Research on Collective Goods Bonn 2013/12. Retrieved from https://www.coll.mpg.de/pdf_dat/2013_12online.pdf Teacher, Law. (2013). Criminal Or Civil Standard Of Proof Law Essays. Retrieved from https://www.lawteacher.net/free-law-essays/criminal-law/criminal-or-civil-standard-ofproof-law-essays.php?cref=1 What are management assertions in auditing? - Questions & Answers - AccountingTools. (n.d.). Retrieved from http://www.accountingtools.com/questions-and-answers/what-aremanagement-assertions-in-auditing.html