Grand Theft Auto is the sixth best-selling video game franchise of all time and easily ranks among the most controversial as well. The games adult content has resulted in caustic and unrelenting criticism by prominent politicians, public service organizations, and major media outlets. Despite that criticism, Grand Theft Auto has been hugely profitable for Take-Two Interactive Software, Inc., its maker and distributor. Take-Two was founded in 1993 by 21-year-old Ryan Brant, the son of a billionaire businessman.

An SEC investigation of Take-Twos financial statements resulted in the company being forced to issue restated financial statements twice in two years shortly after the turn of the century. Then, just a few years later, Take-Two was caught up in the huge options backdating scandal and forced to restate its financial statements a third time. This case focuses on the underlying cause of the initial restatement, which was primarily a series of fraudulent sales transactions booked by the company in 2000 and 2001. Take-Two executives recorded those sham sales transactions to ensure that the company met or surpassed its consensus quarterly earnings forecasts established by Wall Street analysts.

Take-Twos longtime audit firm, PwC, was also caught up in the companys financial reporting scandal. One of many SEC enforcement releases issued regarding that scandal focused on the alleged misconduct of Robert Fish, the PwC partner who had supervised the 1994 through 2001 Take-Two audits. In particular, the SEC criticized the audit tests applied to Take-Twos domestic receivables by Fish and his subordinates. In addition, the PwC auditors were chastised by the SEC for their alleged failure to properly audit Take-Twos reserve for sales returns.

An interesting feature of this case is the close relationship between Robert Fish and Ryan Brant. In addition to serving as the Take-Two audit engagement partner, Fish was apparently the much younger Brants most trusted business advisor. In fact, in an interview with a business publication Fish suggested that he and Brant effectively had a father-son type relationship. Also interesting is the fact that PwC sharply discounted the professional fees that it charged Take-Two. Those discounted fees almost certainly helped to cement PwCs relationship with the rapidly growing company.

Questions to Case 2:

1. Explain the meaning of negligent, reckless, and fraudulent as those terms relate to auditor misconduct or malfeasance.
2. Identify circumstances that may threaten the de facto and apparent independence of auditors.