1. Do you agree with Deloitte's assertion that Adams had no "substantive role" in the 2008 and 2009 Caesars audits? Defend your answer.

2. The SEC applies a principles-based approach to mitigating the risks that may undercut auditor independence. Identify the four guiding principles applied by the SEC to protect the independence of auditors of public companies.

3. Assume Adams had used his personal funds to finance his gaming activities in the Caesars casino. Under those circumstances, would he have violated any ethical or professional standards? Again, defend your answer.

4. The SEC observed in AAER No. 3554 that "any loan... to or from an audit client" is "inconsistent" with auditor independence. Despite that statement, are there any circumstances in which an auditor can have an outstanding loan from an audit client? Explain.

CASE 5.3 Caesars Entertainment Corporation The gambling known as business looks with austere disfavor upon the business known as gambling. Ambrose Bierce In the early 1930s, the Great Depression forced engineering student William Harrah to drop out of UCLA. Known as a 'hustler" by his friends, Harrah began operating a bingo parlor to support himself. After repeated confrontations with law enforcement authorities that centered on the legality of his bingo games, Harrah moved his busi ness operations to Nevada, which had less restrictive gambling laws than California. Over the next several decades, the resourceful and enigmatic entrepreneur assem- bled an impressive collection of gaming properties.' Harrah eventually took his com pany public in 1971 to raise the funds he needed to build the crown jewel of his business empire, the five-star hotel and gaming resort Harrah's Lake Tahoe. In 1973, William Harrah registered Harrah's Inc. with the New York Stock Exchange, making it the first gaming company listed on the Big Board. In 2005, long after its founder's death, the renamed Harrah's Entertainment Inc., became the nation's largest gaming company when it acquired the opulent Caesars Palace in Las Vegas and dox ens of other major gaming properties operated by one of its primary competitors. The company's executives eventually renamed the firm Caesars Entertainment Corporation and listed its common stock on the NASDAQ under the ticker symbol CZR. Over the years, Caesars and its predecessors have had more than their fair share of run-ins with regulatory authorities due to the company's aggressive business prac tices. In early 2013, the Securities and Exchange Commission (SEC) launched an investigation involving Caesars. Ironically, the investigation was not prompted by any actions or decisions by the company's executives but rather by the conduct of James T. Adams, a former partner of the company's audit firm, Deloitte & Touche (Deloitte). Adams had served as the advisory partner on Deloitte's 2008 and 2009 audits of Caesars. During 2009, Adams had allegedly engaged in certain "gaming activities at a Caesars casino that made the SEC question Deloitte's independence during the 2009 audit. Exhibit presents the one-paragraph disclosure made by Caesars of the SEC investigation while it was in progress As noted in Exhibit I. Caesars and Deloitte performed their own independent investigations and concluded that Adams' actions had not impaired Deloitte's independence. Also notice Caesars reported that if a contrary conclusion was ulti- mately reached by the SEC, there could be "material adverse consequences for the company L. In addition to accumulating gaming properties, Harrah eventually collected more than 1,000 vintage cars-cach of which he insisted on driving at least one mile every year and six ex-wives. He was mar ried to his seventh wife when he died in 1978 2. Caesars became a Deloitte audit client in May 2002 shortly after the company dismissed Andersen & 376 SECTION FIVE ETHICAL RESPONSIBILITIES OF INDEPENDENT AUDITORS EXHIBIT 1 DeSCLOSURE OF ONGOING SEC INVESTIGATION HY CAESARS ENTERTAINMENT IN MAY 2013 Deloitte & Touche LLP ("Deloitte) is our independent registered public accounting firm. In April 2013, Deloitte advised the company that a retired Deloitte partner who was formerly the advisory partner on Deloitte's audit engagement for the Company during most of 2009 (a period not covered in this filing) is the subject of a formal investigation by the Securities and Exchange Commission ("SEC"). During 2009, this individual engaged in gaming activities at a Company casino. Deloitte conducted a review of these gaming activities and this individual's role as advisory partner and reported to the Audit Committee its conclusion that the individual's activities did not at any time impair Deloitte's independence, because, among other considerations, these activities were not inconsistent with the SEC's independence rules and furthermore he had no substantive role in any audit or review concerning the company. After the Company conducted its own independent review with the assistance of outside counsel, the Audit Committee of the Board of Directors of the Company accepted Deloitte's report and concurred with Deloitte's conclusion that Deloitte's independence was and is not impaired. If regulatory authorities were to subsequently determine that Deloitte was not independent, such determination may adversely affect our ability to comply with certain obligations imposed by federal securities laws and certain debt agreements, which would have a material adverse effect on our business and financial condition. Source: Caesars Entertainment's Form 10-Q filed with the SEC on May 8, 2013 After graduating with an accounting degree in 1974, James Adams accepted an entry-level position with an accounting firm that was one of the many predecessors of Deloitte. In June 1985, Adams accomplished his primary career goal by being pro- moted to audit partner. In 2005, Adams achieved another career milestone when he was named the Chief Risk Officer (CRO) of Deloitte LLP, the parent firm of Deloitte. Following this appointment, Adams served in a dual capacity as Deloitte LLP's CRO and as an audit partner with Deloitte. Deloitte LLP does not publicly disclose the responsibilities assumed by its CRO, but various online sites suggest that, among other tasks, a CRO monitors, assesses, manages, and mitigates the strategic and operating risks faced by an organization. In January 2009, Adams joined Deloitte's audit engagement team for Caesars Entertainment' midway through the company's 2008 audit. He remained a member of that team through early January 2010 when the 2009 Caesars audit was in prog. ress. In his role as the "advisory partner," the SEC reported that Adams "primarily served as a liaison between D&T and (Caesars'] management and audit committees Adams' principal duties on the Caesars audits included attending the company's audit committee meetings, participating in conference calls of that committee, and 3. Deloitte LLP is the US, member of Deloitte Touche Tohmatsu Limited, the worldwide umbrella firm for the Deloitte organization. Deloitte LLP provides administrative functions for its four subsidiaries that offer a wide range of professional services. Those subsidiaries include Deloitte & Touche. 1. At this time, the company was still known as Harrah's Entertainment 5. This and all remaining quotes, unless indicated otherwise, were taken from the following source Securities and Exchange Commission, Accounting and Auditing Enforcement Release No. 3554.20 May 2014. Note: The SEC did not specifically refer to Caesars' Entertainment in this enforcement release. The CASE 5.3 CAESARS ENTERTAINMENT CORPORATION reviewing the documents and other materials audit committee members relied on in carrying out their responsibilities In June 2004, well before Adams became a member of the Caesars audit team, he arranged for a $100,000 line of credit at one of the company's many casinos. During 2009. Adams "drew down on his line of credit at that casino on multiple occasions. On his first visit in July 2009, he borrowed $85,000. That loan remained outstanding for more than six weeks until he repaid it in early September 2009. Over the next several months, Adams visited the casino four more times, each time drawing a loan against his line of credit. On the first three of those occasions, the loans remained outstanding for as long as a month before he repaid them. On December 16, 2009, Adams visited the casino and borrowed $110,000 after Caesars increased his line of credit to that amount. Adams subsequently defaulted on that loan. On January 13, 2010, Deloitte removed Adams from the Caesars audit engagement team. Deloitte's decision to remove Adams from that team was unre- lated to his gaming activities at a Caesars casino or the $110,000 loan he had out- standing from the casino. In fact, at the time, Deloitte's senior management was unaware Adams had borrowed funds from Caesars although at least one Deloitte partner suspected Adams had done so. According to the SEC, Adams "lied to a D&T partner when he was asked generally if he had casino markers from attest clients of the firm." In May 2010, four months after being removed from the Caesars audit team, Adams retired from Deloitte. In late 2013, Mary Jo White, the Chairwoman of the SEC, announced that her agency had initiated a new program entitled Operation Broken Gate. Chairwoman White stated that the purpose of the program was to identify auditors who neglect their duties and the required auditing standards. Six months later, the SEC announced the results of its investigation of James Adams in Accounting and Auditing Enforcement Release No. 3554. In that AAER, the SEC stressed the critical importance of auditor independence. "Public faith in the reliability of a corporation's financial statements depends upon the public perception of the outside auditor as an inde- pendent professional." The SEC went on to note that any loan ... to or from an audit client" is "inconsistent with auditor independence. Because of Adams' loans from the Caesars casino, the SEC ruled that he had "engaged in improper professional conduct by violating its auditor independence rules. Without admitting or denying the charges filed against him by the SEC, Adams consented to the sanction imposed on him by the agency, which was a two-year ban from 'appearing or practicing before the Commission as an accountant." That pen- alty was inconsequential since Adams had retired from practice four years earlier. The SEC also ruled Adams had caused Deloitte to violate both the SEC's regula- tions and the PCAOB's auditing standards that require an auditor to be independent of its client. Finally, without naming Caesars Entertainment specifically, the SEC ruled Adams had caused the given audit client to violate the federal mandate that 6. More generally, a Deloitte advisory partner is a senior audit partner who has significant industry expertise relevant to a given client. In addition to consulting with members of an audit engagement team on important issues arising during an audit, an advisory partner typically reviews the audit work- papers before the engagement is completed 7 Casinos use markers to keep track of loans made to customers on pre-established lines of credit. The SEC described a casino marker as an instrument utilized by a casino customer to receive gaming chips drawn against the customer's line of credit at the casino 8. MJ. White, "Remarks at the Securities Forum." http://www.sec.gov/News/Speech/Detail SECTION FIVE ETHICAL RESPONSIBILITIES OF INDEPENDENT AUDITORS requires SEC registrants to have their financial statements audited by an independent accounting firm. The SEC did not impose any sanctions on either Deloitte or Caesars nor did the agency require Caesars to have its 2009 financial statements re-audited. In an interview with the New York Times on the day the SEC issued AAER No. 3554, a Deloitte spokesperson sharply criticized James Adams. "This former partner's conduct plainly violated Deloitte's policies, and he lied to Deloitte to conceal his actions. Mr. Adams is no longer part of our organization, and we strongly condemn his conduct