Answer the following questions..

In the court case of Lincoln So-L v Wall, it was suggested that Atchison might have known about the financial statement problems during his audit of Lincoln. ACC was in dire need of obtaining $10 million because of an agreement with the Bank Board to infuse an additional $10 million into Lincoln. Thus, Lincoln was actually the source of its own $10 million cash infusion. Ernst & Young LLC learned of these facts from Jack Atchison after Atchison had become a top official at Lincoln. (USDC - DC 1990) At the time Atchison made his move, the practice of "changing sides" was not against the AICPA's ethics standards; however, the Securities and Exchange Commission (SEC) stated that Atchison's should certainly be examined by the accounting profession's standard setting authorities as to the impact such a practice has on an accountant's independence. Furthermore, they stated that it would seem that a "cooling-off period" of one to two years would not be unreasonable before the client can employ a senior official on an audit. (SEC 1990) Ultimately, the Sarbanes-Oxley Act of 2002 required a cooling-off period of one year after a company's last audit before clients can hire as an officer any member of the audit team. Discussion What impact does employment of former independent auditors by an audit client have on Questions that auditor's independence during the audit? Were Atchison's actions ethical?Confidentiality - Deloitte, Reliance, and KKR Concept Professional accountants have an obligation to respect the confidentiality of information about a client's (or employer's) affairs acquired in the course of professional services. Story According to a court filing by the US State of Pennsylvania Insurance Department, within days of Deloitte signing off on an audit of Reliance Insurance Co. indicating sufficient cash reserves in February 2000, the firm told another client, the Kohlberg Kravis & Roberts (KKR) investment partnership, that Reliance was suffering a "seriously deficient" $350 million shortfall in its reserves. (WSJ 2003) Confidentiality - Deloitte, Reliance, and KKR (continued) Deloitte told the investment company about the shortfall "in exchange for millions of dollars" in accounting fees, according to the state. Deloitte "exploited the competing interests of [ the investment company] and Reliance and benefited financially by receiving payments from clients on opposite sides" of the proposed deal, according to the state. KKR also got another opinion from Am-Re Consultants, of Princeton, an affiliate of American Reinsurance Co. Am-Re estimated Reliance's reserve shortfall at $500 million, the state reported. (DiStefano 2003) In 2001 Reliance Insurance Company, an auto and workman's compensation insurer, defaulted on its stock, bonds and loans, and left policyholders and industry bailout funds with more than $2 billion in unpaid losses. The Pennsylvania Insurance Department was charged with liquidating the assets of the company. Deloitte issued a short written statement accusing the state of "serious distortion of the facts." According to Deloitte, Pennsylvania Insurance Commissioner E. Diane Koken was trying to "improperly" fault Reliance's ex-auditors "for a business and regulatory failure that largely rests with [Koken] herself." (DiStefano 2003) Discussion . Does an auditor violate the confidentially of their client by revealing the client's financial Questions condition to another client? Why would an auditor report sufficient cash reserves in their audit report and then tell another client that the audited company had a shortfall cash position?Accountant Falsifies Accounts for Bosses at WorldCom (continued) Ms. Vinson felt trapped. That night she reviewed her options with her husband and decided to put together a resume and begin looking for a job. Nevertheless, she made the entries transferring the $771 million, backdating the entries to February by changing the dates in the computer for the quarter. She faced the same dilemma in the second, third and fourth quarters of 2001. Each subsequent quarter she made more fraudulent entries. (Pulliam 2003) Ms. Vinson began waking up in the middle of the night, unable to go back to sleep because of her anxiety. Her family and friends began to notice she was losing weight and her face took on a slightly gaunt look. At work she withdrew from co-workers, afraid she might let something slip. In early 2002, she received a promotion, from senior manager to director, along with a raise that brought her annual salary to about $80,000. (Pulliam 2003) In March 2002 the SEC made requests for information from WorldCom and Cynthia Cooper, head of internal auditing (see Chapter 1) started asking questions. Ms. Vinson and two other accountants hired an attorney and told their story to federal officials from the FBI, SEC and US attorney, hoping to get immunity from prosecution for their testimony. On August 1, 2002, Ms. Vinson received a call from her attorney telling her that the prosecutors in New York would probably indict her. In the end, they viewed the informa- tion Ms. Vinson had supplied at the meeting with federal officials as more of a confession than a tip-off to wrongdoing. Within hours, WorldCom fired her because of the expected indictment. The only thing she was allowed to take with her was a plant from her desk. (Pulliam 2003) Two of her colleagues pleaded guilty to securities fraud. Unable to afford the legal bill that would result from a lengthy trial, Betty Vinson decided to negotiate a guilty plea as well. Discussion Was Betty Vinson justified in her actions because there were at the request of her superiors? Questions Why? If you were in Ms. Vinson's situation, what would you have done?Lincoln Savings and Loan - Employment of a Former Auditor Concept Independence in Fact and Appearance Story Upon completion of the 1987 Arthur Young (later Ernst & Young) audit of Lincoln Savings & Loan Association (Lincoln) which resulted in an unqualified opinion, the engagement audit partner, Jack Atchison, resigned from Arthur Young and was hired by Lincoln's parent American Continental Corporation (ACC) for approximately $930,000 annual salary. His prior annual earnings as a partner at Arthur Young was approximately $225,000 (Knapp 2001) Charles Keating, Jr. siphoned money out of Lincoln Savings and Loan for his own benefit from the day he acquired Lincoln in 1984 until the Federal Home Loan Bank Board (FHLBB) seized control on April 14, 1989. At the time of the seizure nearly two-thirds of Lincoln's asset portfolio was invested in high-risk land ventures and Keating had used fraudulent accounting methods to create net income. In the end, Lincoln's demise involved investors' losses of $200 million and its closure cost US taxpayers $3.4 billion in guaranteed deposit insurance and legal, making it the most costly savings and loan failure in US history. For their part in the Lincoln failure, Ernst & Young paid the California State Board of Accountancy (the state agency which registers California CPAs) $1.5 million in 1991 to settle negligence complaints and in 1992 paid the US Government $400 million to settle four lawsuits. (Knapp 2001)Accountant Falsifies Accounts for Bosses at WorldCom Concept Ethics and the employed accountant - caving in to pressure from your bosses Story On October 10, 2002 the US attorney's office announced that Betty Vinson, former Director of Management Reporting at WorldCom, had pleaded guilty to two criminal counts of Accountant Falsifies Accounts for Bosses at WorldCom (continued) conspiracy and securities fraud, charges that carry a maximum sentence of 15 years in prison. One year later, October 10, 2003, she was charged with breaking Oklahoma securities laws by entering false information on company documents a charge that potentially carries a ten-year prison sentence. (English 2003) Over the course of six quarters Vinson made illegal entries to bolster WorldCom's profits at the request of her superiors. Each time she worried. Each time she hoped it was the last 2003) time. At the end of 18 months she had helped falsifying in profits. (Lacter In 1996, Ms. Vinson got a job in the international accounting division at WorldCom making $50,000 a year. Ms. Vinson developed a reputation for being hardworking and diligent. Within two years Ms. Vinson was promoted to be a senior manager in WorldCom's corporate accounting division where she helped compile quarterly results and analyzed the company's operating expenses and loss reserves. Ten employees reported to her. (Pulliam 2003) Work began to change in mid-2000. WorldCom had a looming problem: its huge line costs - fees paid to lease portions of other companies' telephone networks - were rising as a percentage of the company's revenue. Chief Executive Bernard Ebbers and Chief Financial Officer Scott Sullivan informed Wall Street in July that the company's results for the second half of the year would fall below expectations. A scramble ensued to try to reduce expenses on the company's financial statements enough to meet Wall Street's expectations for the quarter. But the accounting department was able to scrape together only $50 million, far from the hundreds of millions it would take to hit the company's profit target. In October, her boss told Vinson to dip into a reserve account set aside to cover line costs and other items for WorldCom's telecommunications unit and use $828 million to reduce expenses, thereby increasing profits. (Pulliam 2003) Ms. Vinson was shocked by her bosses' proposal and the huge sum involved. She worried that the adjustment wasn't proper. She agreed to go along. But afterward Ms. Vinson suffered pangs of guilt. On October, 26, the same day the company publicly reported its third-quarter results, she told her colleagues who were also involved that she was planning to resign. A few suggested that they, too, would quit. CFO Sullivan heard of the mutiny in accounting and called Vinson and other employees into his office. He explained that he was trying to fix the company's financial problems. Think of it as an aircraft carrier, he said, We have planes in the air. Let's get the planes landed. Once they are landed, if you still want to leave, then leave. But not while the planes are in the air. Mr. Sullivan assured them that nothing they had done was illegal and that he would assume all responsibility. He noted that the accounting switch wouldn't be repeated. (Pulliam 2003) That night, she told her husband about the meeting and her worries over the accounting. Mr. Vinson urged her to quit. But in the end, she decided not to quit. She was the family's chief support, earning more than her husband. She, her husband and daughter depended on her health insurance. She was anxious about entering the job market as a middle-aged worker. By the end of the first quarter of 2001, it was clear Ms. Vinson could find no large pools of reserves to transfer to solve the profit shortfall. Sullivan suggested that rather than count line costs as part of operating expenses in the quarterly report, they would shift $771 million in line costs to capital-expenditure accounts which would result in decreased expenses and increased assets and retained earnings. Accounting rules make it clear that line costs are to be counted as operating leases, not capital assets