II Segereampie When So The Leslie Fay Companies Paul Dalib.graduated with an accounting degree in 1969 and immediately accepted an entry-level position in the accounting department of The Leslie Pay Companies, a women's apparel manufacturer based in New York City Fred De Leslie Fay's founder personally hired with Dw is the young acting as the same traits that he possessed. Both men were ambitious, hard driving and Alter joining Leslie Fay Diy struck parationship with John C. the son of the company's founder. She had ned the company in 1960 after earning an economies degree from the Whiten School at the University of Pennsylvania. In 1972. the younger una became lessed and some responsibility for the company's day-to-day operations over the next few years Dolls would become one of John Dumest trusted alle within the company, quick rose through the ranks of Leslie Fay, eventually becoming the company's chief financial officer (CFO) and senior vice president of finance Lesley's corporate headquarters were located in the heart of Manhattan's bustling met district. The company's accounting offices, however, were 100 miles to the northwest in Wilkes-Barre Pennsylvania. During Belt tenure as Leslie Fay's top accounting and finance officer, the Ware location wasted with the name "C The strict and stocratic Balboruled the Wes-Barre site with an irenlist When dosing the books at the end of an accounting period. Police required his subordinates to put in 16-hour shifts and to work through the weekend. Arriving two minutes late for work exped Dalilinhabitants to a scathing reprimand from the Co. To make certain this employees understood what he expected of the posted a list of rules within the Wikes-Barre offices that their senior managers in the headquarters office requested financial Information from Wilkes-Barre. Bolehotensent them ante demanding to know why they needed the information Boliwia top lieutenant at the Wilkes Barre site was the company controller, Donald Kenia. Os Calobrequest trips to Me Kenia assumed control of the accounties. Unlike his boss. Kenia was a soft-spoken individual who enjoyed following orders much more than giving them. Because of Ben's meek personality, friends and coworkers were stunned in early February 1993 when he took full carming id been overstated by apprendimately 30 million from 1990 through 1992 Following the public dosure of the large fraud. John Paul repeatedly and many insisted that he and the other top executives Leslie Fay, induding Pillowwar the contine megtarties perpetrated by Kent. Neverthelemy did not have an incent-based compensation contract tied to the company's earning, meaning that he had not be rectly from the inflated earnings figures he had manufactured. On the other hand, La band several other stories are Elodies of the company's stock and had received substantial year-end bonuses in some cases bonuses larger than their annual salaries, as result of Kenia's alleged scom Even after Kenia pleaded guilty to read charges many third parties remained unconvinced that he had directed the fraud When asked by a reporter to comment on Kenia's confession, a Leslie Fay employee and dese friend of Kenia indicated that he was right now, real decent guy and then went on to observe that something doesat add Lipstick Red Rolls Royces and the Orient Express Similar to many of his peers. Fred Served his country during World War I dyr 3:26 Similar to many of his peers. Frederved his country during World War II But instead of storming the beaches of ander pursuing Remmel across North Africa, Bad served coustry by making uniforms-uniforms for the Women's Army Corps Following the war. Porte decided to make use of these quired in the military by creating a company to manufacture women's dresses. He samed the company after his daughter Leslie Doncsformersbordinates and colleagues in the industry real that he was a character. Over the years, he reportedly developed reweled in shocking new friends and baby pulling his shirt to reveal escanead collected with runs in some of New York Bouchergehed Adding to Donc legend within the top rung of New York high sciety was pred Royce that he used to crue and down Manhattan's crowded streets from quickly establishing this company as player in the wind Intensely compete women's pelindustry. From the beginning Domofocused Leslie Faye kyse that industry. He and indeer deed medical and Conservative dresses formes Lesley's principal customers were the large departments World War II by the late 190 Ledelay was the largest women's dresses to department stores. At the time, Leslie principal competits included Donna Karan Oscar de la Nicole Miller New York, and Alberto But, in the mine industry observers, Le Caire, an upstart company that had been Founded in 1976 by an unknown designer and her husband, easily redes Les Faces and fiercestral Gabent was the enly publicly owned women's apparel manufacturer in the 1980 that had large amal sales to Leslie Fred.took his company public in 1952. In the early 1980 the company west private for a period of several years in a levenged buyentechestrated by us who became the company's GEO and chairman of the board following lister's death in 1982. The younger poleted 540 million and a large bundle of Leslie Fay stock when their remerged as a public company in 1986 Lehister before him. John Deed that the top secutive of a competed in the world of certain amount of panther, the popular and outgoing businessman invested in several Broadway shows and became mainstay Manhattan's celebrity circuit The widthurn realized in the mid-1980s allowed him to buying Mediterranean style estate in Palm Beach, Florida, where he he corsete during the winter months with New York City's rich and To reward his company's best clients he encered the legendary Orient Express for a festive way out from Paristo Despite Leslie Fay's site and prominence in the apparel industry. Je Dow.cooperating the company whether for decades. Unlike his competites Boucle extensive market testing to changes in the the relied on his and his designers Inn in developing each' neweries Donut was also show to integrate competentes company's key internal functions. woman manufacturers had developed computer network to meter daily of their products to customer outlet stats continued to track the progress of their by phong 3:27 the closed was meant at the company's Wes Barre Location was slow to take advantage of the speed and efficiency of computer data procesi competition within the women's apparel industry did not preventie Fay from prospering after che scoreded his father. Thanks to the younger Business, Leslie Faysalves and caring wroty under his leadership Fashion becomestible By the late 1900, a trend that had been developing within the women's pare industry for several years became even more evident During the decade. toshio gradually became the. The so-called of Americant that come comme haling at the new design marketed by parents Instead for denims t-shirt and other mercolette including well-womineerd garments that they had purchased years earlier. In this trend had a much more pronounced impact on the buying habits of younger women. Burada.com the 30-c-55-year-old go back the commestargeted by Leslie decided that casual was the way to go The trend towards thing had the most dramatic impacto Women's dresse. Since Lesti Fay's inception, the company had concentrated its product offerings en drevene pas became widely recognized as suitable and stylish walls during the 1970s. In the early 1970, les begagnad declining Most carpetsecutives in the women's appareindustry believed this trend would eventually reverse. The preference for more casual apparel that developed during the 1980s herever, resulted in declining dress sales throughout the end of the century The reason of the late 19 and younded the problems facing the windstry. The many comes to curtail their discretionary expenditures, including purchases of new dothes. They wide dedine in retail spending ad particularly for reaching implications for the major department store chains Leslie Foy's principal customers Events of the economicond we is the retail sector cut deeply into the sales and caring department competitors or toe. In aday incurred substantial loss when it wrote ed a receivable from Mied/Federated Department Stores her the large retailer file for bankruptcy. Many the department store cains that survived wanded fancial concessions from their supplies. These conduced payment terms, moenie polecen assistance to develop and instore displays, Roses and The structural and economic changes affecting the women's Industry during the late 1980s and early 1990s had a major impactos most of its leading companies. Even Liz Claiborne, whese revenues ed from 547 million in 1979 to more than by 1987, faced Slowing sales from its product lines and was eventually forced the large entory write-downs. Occasionally, industry publications ported medes cartertydence But the companies that manufacturers but rather that marketed their wars to discount Despite the trauma being experienced by the competits. Leslie reported impressive sales and carings throughout the late 1900 and early 1980s. Leslie Forstpil quarterly camins release during that time frame indicated to the company had peccarian les for the last completed period Porec in October 1991. Domoned that lede hadded recorders the third quarter of the year deipite the code retail sales and consumer spending* presents Leste Toy's comidated bulance sheets and income statements for through 1991. Formare purposes pers for by fancial in the Industry in 1991. These benchmarks are composite derived from date reported by the news that putih Exhibit The Leslie Fay Companies 1987-1991 Balance Sheets 3:27 The Leste Toy Companies ASSETS Current : 1113 10. 19.2 225 3146 15.5 leveres Pagal Expens & Other Coment Total Cunetes Property. Plant, and Equipment Deferred Changes and Others LIABILITIES AND STOCKHOLDERS LOUITY 155 30 Current Mature of Lost Dube Accounts Payable Acore Interest Table Acord Compensation Accrued Expenses & Other Income Tax Payable 16 14 Deferred Credits & Other Nocument TE z Connon Stock Capitkin Excess of Per Value 5 sos II 15) (107 Tromy Stock Total Soldiers Equity Total Liabilities and 3. SS50 50 Exhibit The Leslie Fay Companies 1987-1991 Income Statements The Lastle Toy Companies Cated Income Statements 1987-1903 101 101000 Cost of Sales Growt Operating Expenses Sering Who Canecal and 13 Anoramio rants Total Operating OD 20 I 1585 Nouring Care (C) Income Bootes on com 143 16 S21 251 21 Income per Share Exhibit 2The Leslie Fay Companies, 1991 Industry Norms for Key Financial Ratios 3:27 Quick Race Debt tots agt fronts Receivable Travel Age of Accounts Receivable Total Tv Gro Marie Puft Morgia on Sales The greprison Bremained upbeat with the less press regarding his company's pret competitors Gestioned how the completo sustain and caring in the face of the stubborn in the al sector, weil mated that retailers were increasingly critical Payproduct fine. "Old-fashioned strony drahand overpriced were djectives that the company's reps routinely heard they made To keep his customers oppy.top printmart-dows in testes wholesale prices and grant home cumstangebotes when they found themed with quantities of the company product shapes Doncsobbied financial Analysis tracking Leslie Fay's stock any reported that the hein 1992 and chastised her for issuing a car forecast for lesey that was to Houston, We Have Problem On Friday morning. Try 23. 1993. Paul.com Concwho was a business trips. problem ...the informed his boss of the coming hoa thu Donald Kenia ad rely carried out the past years According to Collesadmitted to masterminding the although some of his subordinates had helped himinland conceal the various scam Durrection to the starting When revealing the rand to the press the following Monday denied having any chastot might have med et misrepresentasie Fay's facial data todenied that he and the other top executive of Leslie Fahalected Reisen wrongdoing He was particularly strident in defending his dere friend Pul..who had supervised Kenia and who ww directly responsible for the integrity of Leslie Fusing records Corydd porterebbe didelow anything During the following and mother an increasingly hostile burini prehouded for more details of the red while critics openly questioned whether he was being totally forthcoming regarding his lack of knowledge of Kenia's contings Responding to the critiche bed and that the than being involved in the fire he was principal victim olhold mysel personally responsible No Inmyheartofheart feed the victim now there are the victims. But the biggest victim *Such protestations did not prevent cities from using why Dance Withely accepted Leslie Foy's impressive operating results while many of the company's competitors were struggling ancially Shortly after blidly dised Keisrad Leslie's audit committenched an intensive investigation of its impact on the company's financial statements for the previous several years. The committerende come that study 3:27 company's ancial statements for the previous years. The committed Arthur Anders to be complete that Pending the outcome of the investigation cantly placed Dopory pada DO Sedan had served as Leslie Tay's since the mid-1970 and angled opinions each year the company's facial statements Following meer of the rando Seide withdrew it and print on the company's 1990 and 1991 financial statements. In the eng weeks, Leder stockholders BDO Sedans des In April 1993, DO Sedan officials contacted the securities and Exchange Commission (SEC) and inquired regarding the status of the firm's independence from Ledeyse he pending the SEC informes Sedanas independence was paded by the wiltwhich forced them to resignaday's early May 1993. Company management imately printed Arthur Andersen as Leslie's Fay new auditor In September 1991. Leslie Fay's and committee completed itselt month investigation of the counting and the resulting - report was reviewed by members of stay's beard and the mitted to the SEC and federal proces there word publicly sew key findings were to the pres. The most starting feature of the waits perver According to a company insider who read the report. There was by the cost side of the company leder for the years that The key focus of the reactivity was esse Kenia and his bardinated in the number of manufactured achtertyperied to reduce the permite finished goods and increase the company's primena During period ending physical inventories, the com manufactured the phantom venter they had previously the company's accounting records Forgingirys for nonexistent products, inflating the number of dresses of specific style en hand and bricating large amounts of bages in the were common ruses used to overstate nemenduring the period Other acting missed by Kensindded into period ending expenses and abilities prerecording'ders received from customers come sales to boost Lestare wear the end of accounting period failing to write off uncollectible receivables and ignoring discounts outstanding receivables grand to large customer experiencing slow sales of the company's products Allegedly. Kenis decided each period what montere Leslie should report le and his subordinates the adjusted Leslie Ray's accounts with redulent jumale tries to achieve that profilure From 1990 through the end of 1992, the control overstated the company's profits by appreciately Kenia ed his co-conspirators molded Leslie Financial statements so that he ancial raties would be consistent withistorical trends The lascial rate that the fraudsters paid particular attention to was Leslie Pays gross profiterentur. Por several years, the company's Bross profiterentred hevered near 30 percent les actual gross propers approximately 1990s, but Kenia relied on his sented bogel accountries inflate that matte near its historical com Excepted to the press from the wait.committee's reportage curated on www.responsibility for Leslie Fug's acting irregularities. The report indicated that there was so evidence that he and other members of Leslie Fay'shiqaretten had been aware of these relaties, but the report die these cutives for 3:28 been aware of these regulares the report on these secutives for failing to regressively pursues and suspicious circumstances they had encountered during the course of Keniastraat of these circumstances had been vily invested the earlier than may 1993. In particular the watcome questi why a vestigated Leslie /searly stable gross profit percentage in the early 1990s getest problems in other women dress manufactures and the pretty poor response to any of the company's new product offerings during Following the completion of the audit comes investigation in September 1991. Lessardel directors allowed Domains the Order responsibilities related to the company's operations. The band created cekler ostside directors te verse the company's operations while Lestie ay dealt with the aftermath of the large-scalera. The board med Paul Galbeediefoane president office and replaced him with Arthur Andersen who had been involved in the di committeestigation O Sedan: Odd Man Out In April 1993, Leslie Failed for protection from its credits under Castell the federal ruptcy code Press reports of Kelas fraudulent scheme had out all the company's the aditional debt and equity capital that needed to continues perations. By early April 1991, the price rapped by early 5 percent since the fest details of the red become public to marr The company's plummeting stock price and the mounting crecimofits offices in the business press ricordanowsuits by angry sted-bolders in there are and the company's time de 100 Set The lawsuits that named DO Sedat as a defendant changed at the firm had been at least redes indigestias periodical statements during the early 1990s. Hewardshire press that leasfinancial dat had been plete with redag These red flags included impossible trends in the company's statements and unreasonably generous bespaid to top executives brunes linked directly to the red carings Leeu reported each successive period. For 1991. Den received total salary and buses of 53.6 million, three times more than the 1991 compensatie Gaiborne's whese company reported a more than double these of Leslie BD Sedan officialschafedat published reporting their Leslie Faydi These officials insisted that BDO Sedan was being indicted in the press on the basis on and complete Information. These same individuals also maintained that Leslie Fay's top management principally her the of the responsibility for the massive rol During various court proceedings following the dinosure of the Leslie Fayfmany parties questioned the objectivity of the forenie investigation supervised by Leslie Pays de committee that had effectively indicated on these skeptis sustel that the members of the audit committee had been reluctant critic Banca Tosquelchach criticism the federal judge presiding over Leslie Fay's bankruptcyfing appointed as independentamine Charles to prepare another report on the details of the rad Sic was also cred with in the individuals responsible for the freed and those responsible for boling tower In August 1991, the US Bankruptcy Couted the so-called Slow Report this document correberited the key findings of the audit committee investigation. Similar to the audit committee repet the Sport largelyesented the examines report condoles there is no evidence to suggest that we damsexist against any members of Leslie Fay's current management or its bound The Swo. Peport went on to suggest that although there were likely viable durims against former company estives Kenia and based upon presently available information the limited these individuals made it ecemically infeste for the bar court to pursuindicted se 3:28 cotto purse the meaty, the part indice quality of Do Sediments of Leslie Party ating that the may be claims worth pursuing against ... Scdman and that Sed egy in performing account for Lay Pollowing the release of the SportLeela teholders filed a large civil lawsuit again. Sed in the federal bankruptcy Courts. At approximately the same time, bo Sedan filled aalastele Ray's principal officers, including lates, commenting the latter, Semasa for the frequently upon the shoulders of Leslie Pay's cutest noted that they had been intentionally led by the company Leslie Pay's management responded immediately to the news tuto Sedman had named Johnnid fellow effice defendants in a large civile mbotaned and unfounded allegations made today by Semanare a desexample of Testy and are dearly as attempt by the accounting first divertention from its own apparent negligence by blaming others." Epilogue In July 1997.a federal judge approved a 34 million sentiment to the large number lawsuits filed by Ledie Pays stachelders and credits the company, executives and SedmanRDO Sedman contributed to these although the firm reported that it was agreeing to the timely because it was the most comical and expeditious way to put this matter behind the Lade Pay emerged from federal bankruptcy court Over the next years, the company returned to a profitable condition before being purchased in late 2001 nement fund. A few months later, in April 2002. Jahontacted achievement award at the annual calage Award yupo by On October 31 1996, federal prosecutoriela 21-cut fraud inimesi Zaiban. The specific charges included conspirary.waling tale statements to the bank trand and wire trand Unite the public three years earlier Dealdad broken down under relentless quoing by federal and add that Lobbformer bass, had been the architect of the Ladie Bayfred Accedi Kelas testimony one and directed every other Because deaty Keland several of his words agreed to make the carmos number of fraudulent atrisins Pays records that he had demanded. Colladale compelled Kelato acceptfall responsibility for the accounting irregularities when it became apparent in late Following a series of lengthy and fiercely contested pretral bearing cane was finally heard in federal court in the summer of 2000.com 18 of the 21 frasad countled against him. History immediately applied the gally verdict. The res principal contention during the appeal was that there was physical evidence to link their client to the fraud instead they mustained that Cotion had hinged almost entirely upon the veracity of Kena's testy The federal judge who presided over Doppel did not dishes regularites. Despite that fact, the judge denied peal. The edge carved a substantial amount of circumstantial evidence had been pred during studying the evidence in painting detail the judge ruled that it was much more clatent with Kanda's testimony than that Bow A key factor contributing to the judge's decision was the usual relationship that existed between Boland during their longtem with the Paya that had been documented and discussed at length during the trial. The gated that Colbertad dominated through intimidation and in the piombed the case, the judge referred multiple occasions to neplade during 1012 demonstrate how.completely had controlled in forcing Klatot responsibility for an accountserrur thuthad been discovered in Bayan Records Costed that Kenia tell another company cutie, Tam O January 21, 2002 edhe 3:28 cendants in a large and lite tanned and und algade by Sida med revient history and are clearly an empt by the accounting first diver attention from apparet negligence by blamingo I Epilogue In July 1997, a federal judge approved a 34 million selement to the large number Lawsuits filed by Leslie Ray's stockholders and credits against the company is executives, and to Sedman. RDO Sedan contributed 58 million to the settlement pool although the firm reported that it was agreeing to the timestay because was the Fay emerged from federal han eruptcy court. Over the next several years, the challe company returned to a profitable condition before being purchased in 2001 byla nement fund. A few months later, in April 2002. Jahoma eelved achievement award at the annual American Image Award a given spored by the October 31 1996, federal prosecutors filed a 21-fraud indictment cob The special charges include comprato the SEC Dank fraud and wirefraud Unknown to the public three years earlier. Donald had broken down under relentless questioning by federal grandaid that Lalbahis former bass, had been the architect of the ladie Fay rand According Kenlastest had overseen and directed every major Because of intimidating personality, Kenia and all his bedehad agreed to make the carmos number of fraudulenteri Ladie Pays cards that he had demanded had ale compelled Kela total reponsibility for the accounting irregolarities when it became apparently 1993 that there would be Following a series of lengthy and fiercely contested pretral hearing cane was finally heard in federal court in the summer of 2000, was comida 18 of the 21 fraud countled against him. History.me pealed verdict. The money principal contention during the appeals that there we physical cedence to think their client to the fraud. Intradhey maltained that the Cention had hingedalt entirely upon the veracity of Beste The federal de who presided over Dupealid display principal contention. Throughout the fraud the former Challenge leaving incriminating physical evidence that linked him directly to the accounting substantial andet af circumstantial evidence had the presented during the mother studying the evidence in painting detail the judge ruled that it was there comitent with many than that Aley factor contributing to the judge's decision was the relations that existed between Bolibar and Kenia during the long tenure with Leslie Paya that had been documented and discussed at length during the trial. The dated that Lesba, hadde en hgh intimidation and earn the piche the case, the judge referred multiple accasions to an eplade during 1992 demonstrate how completely Bold controlled Kesan facing to take pochty for an error that had been in Las record. Doted that tell another company. Tam On January 21, 2002, almost eactly nine years after the news of the Lady wurfaced in the press Vaalwassemenced tree years in federal his role in plotting and overseeing that allowed for personal In 1999 caminants of only $17.000 was alfined 900. Mengapa overturn his conviction reported to the federal correctional facity County, Peraylania in carey September 2003 te beginning is nine years exchange for his testimony a Bolob, Donald Kenia was allowed to play two counts of making false statements to SEC. 2001, Kelawas sentenced to the years in the wo Federal Price Camp in Mongemery, Pennsylvania 1. Prepare common-sized financial statements for Leslie Fay for the period 1987-1991. For that same period, compute for Leslie Fay the ratios shown in Exhibit 2. Given these data, which financial statement items do you believe should have been of particular interest to BDO Seidman during that firm's 1991 audit of Leslie Fay? Explain. 2. In addition to the data shown in Exhibit 1 and Exhibit 2, what other financial information would you have obtained if you had been responsible for planning the 1991 Leslie Fay audit? 3. List nonfinancial variables or factors relevant to a client's industry that auditors should consider when planning an audit. For each of these items, briefly describe their audit implications. 4. Paul Polishan dominated Leslie Fay's accounting and financial reporting functions and the individuals who were his subordinates. What implications do such circumstances pose for a company's independent auditors? How should auditors take such circumstances into consideration when planning an audit? 5. Explain why the SEC ruled that BDO Seidman's independence was jeopardized by the lawsuits that named the accounting firm, Leslie Fay, and top executives of Leslie Fay as codefendants. II Segereampie When So The Leslie Fay Companies Paul Dalib.graduated with an accounting degree in 1969 and immediately accepted an entry-level position in the accounting department of The Leslie Pay Companies, a women's apparel manufacturer based in New York City Fred De Leslie Fay's founder personally hired with Dw is the young acting as the same traits that he possessed. Both men were ambitious, hard driving and Alter joining Leslie Fay Diy struck parationship with John C. the son of the company's founder. She had ned the company in 1960 after earning an economies degree from the Whiten School at the University of Pennsylvania. In 1972. the younger una became lessed and some responsibility for the company's day-to-day operations over the next few years Dolls would become one of John Dumest trusted alle within the company, quick rose through the ranks of Leslie Fay, eventually becoming the company's chief financial officer (CFO) and senior vice president of finance Lesley's corporate headquarters were located in the heart of Manhattan's bustling met district. The company's accounting offices, however, were 100 miles to the northwest in Wilkes-Barre Pennsylvania. During Belt tenure as Leslie Fay's top accounting and finance officer, the Ware location wasted with the name "C The strict and stocratic Balboruled the Wes-Barre site with an irenlist When dosing the books at the end of an accounting period. Police required his subordinates to put in 16-hour shifts and to work through the weekend. Arriving two minutes late for work exped Dalilinhabitants to a scathing reprimand from the Co. To make certain this employees understood what he expected of the posted a list of rules within the Wikes-Barre offices that their senior managers in the headquarters office requested financial Information from Wilkes-Barre. Bolehotensent them ante demanding to know why they needed the information Boliwia top lieutenant at the Wilkes Barre site was the company controller, Donald Kenia. Os Calobrequest trips to Me Kenia assumed control of the accounties. Unlike his boss. Kenia was a soft-spoken individual who enjoyed following orders much more than giving them. Because of Ben's meek personality, friends and coworkers were stunned in early February 1993 when he took full carming id been overstated by apprendimately 30 million from 1990 through 1992 Following the public dosure of the large fraud. John Paul repeatedly and many insisted that he and the other top executives Leslie Fay, induding Pillowwar the contine megtarties perpetrated by Kent. Neverthelemy did not have an incent-based compensation contract tied to the company's earning, meaning that he had not be rectly from the inflated earnings figures he had manufactured. On the other hand, La band several other stories are Elodies of the company's stock and had received substantial year-end bonuses in some cases bonuses larger than their annual salaries, as result of Kenia's alleged scom Even after Kenia pleaded guilty to read charges many third parties remained unconvinced that he had directed the fraud When asked by a reporter to comment on Kenia's confession, a Leslie Fay employee and dese friend of Kenia indicated that he was right now, real decent guy and then went on to observe that something doesat add Lipstick Red Rolls Royces and the Orient Express Similar to many of his peers. Fred Served his country during World War I dyr 3:26 Similar to many of his peers. Frederved his country during World War II But instead of storming the beaches of ander pursuing Remmel across North Africa, Bad served coustry by making uniforms-uniforms for the Women's Army Corps Following the war. Porte decided to make use of these quired in the military by creating a company to manufacture women's dresses. He samed the company after his daughter Leslie Doncsformersbordinates and colleagues in the industry real that he was a character. Over the years, he reportedly developed reweled in shocking new friends and baby pulling his shirt to reveal escanead collected with runs in some of New York Bouchergehed Adding to Donc legend within the top rung of New York high sciety was pred Royce that he used to crue and down Manhattan's crowded streets from quickly establishing this company as player in the wind Intensely compete women's pelindustry. From the beginning Domofocused Leslie Faye kyse that industry. He and indeer deed medical and Conservative dresses formes Lesley's principal customers were the large departments World War II by the late 190 Ledelay was the largest women's dresses to department stores. At the time, Leslie principal competits included Donna Karan Oscar de la Nicole Miller New York, and Alberto But, in the mine industry observers, Le Caire, an upstart company that had been Founded in 1976 by an unknown designer and her husband, easily redes Les Faces and fiercestral Gabent was the enly publicly owned women's apparel manufacturer in the 1980 that had large amal sales to Leslie Fred.took his company public in 1952. In the early 1980 the company west private for a period of several years in a levenged buyentechestrated by us who became the company's GEO and chairman of the board following lister's death in 1982. The younger poleted 540 million and a large bundle of Leslie Fay stock when their remerged as a public company in 1986 Lehister before him. John Deed that the top secutive of a competed in the world of certain amount of panther, the popular and outgoing businessman invested in several Broadway shows and became mainstay Manhattan's celebrity circuit The widthurn realized in the mid-1980s allowed him to buying Mediterranean style estate in Palm Beach, Florida, where he he corsete during the winter months with New York City's rich and To reward his company's best clients he encered the legendary Orient Express for a festive way out from Paristo Despite Leslie Fay's site and prominence in the apparel industry. Je Dow.cooperating the company whether for decades. Unlike his competites Boucle extensive market testing to changes in the the relied on his and his designers Inn in developing each' neweries Donut was also show to integrate competentes company's key internal functions. woman manufacturers had developed computer network to meter daily of their products to customer outlet stats continued to track the progress of their by phong 3:27 the closed was meant at the company's Wes Barre Location was slow to take advantage of the speed and efficiency of computer data procesi competition within the women's apparel industry did not preventie Fay from prospering after che scoreded his father. Thanks to the younger Business, Leslie Faysalves and caring wroty under his leadership Fashion becomestible By the late 1900, a trend that had been developing within the women's pare industry for several years became even more evident During the decade. toshio gradually became the. The so-called of Americant that come comme haling at the new design marketed by parents Instead for denims t-shirt and other mercolette including well-womineerd garments that they had purchased years earlier. In this trend had a much more pronounced impact on the buying habits of younger women. Burada.com the 30-c-55-year-old go back the commestargeted by Leslie decided that casual was the way to go The trend towards thing had the most dramatic impacto Women's dresse. Since Lesti Fay's inception, the company had concentrated its product offerings en drevene pas became widely recognized as suitable and stylish walls during the 1970s. In the early 1970, les begagnad declining Most carpetsecutives in the women's appareindustry believed this trend would eventually reverse. The preference for more casual apparel that developed during the 1980s herever, resulted in declining dress sales throughout the end of the century The reason of the late 19 and younded the problems facing the windstry. The many comes to curtail their discretionary expenditures, including purchases of new dothes. They wide dedine in retail spending ad particularly for reaching implications for the major department store chains Leslie Foy's principal customers Events of the economicond we is the retail sector cut deeply into the sales and caring department competitors or toe. In aday incurred substantial loss when it wrote ed a receivable from Mied/Federated Department Stores her the large retailer file for bankruptcy. Many the department store cains that survived wanded fancial concessions from their supplies. These conduced payment terms, moenie polecen assistance to develop and instore displays, Roses and The structural and economic changes affecting the women's Industry during the late 1980s and early 1990s had a major impactos most of its leading companies. Even Liz Claiborne, whese revenues ed from 547 million in 1979 to more than by 1987, faced Slowing sales from its product lines and was eventually forced the large entory write-downs. Occasionally, industry publications ported medes cartertydence But the companies that manufacturers but rather that marketed their wars to discount Despite the trauma being experienced by the competits. Leslie reported impressive sales and carings throughout the late 1900 and early 1980s. Leslie Forstpil quarterly camins release during that time frame indicated to the company had peccarian les for the last completed period Porec in October 1991. Domoned that lede hadded recorders the third quarter of the year deipite the code retail sales and consumer spending* presents Leste Toy's comidated bulance sheets and income statements for through 1991. Formare purposes pers for by fancial in the Industry in 1991. These benchmarks are composite derived from date reported by the news that putih Exhibit The Leslie Fay Companies 1987-1991 Balance Sheets 3:27 The Leste Toy Companies ASSETS Current : 1113 10. 19.2 225 3146 15.5 leveres Pagal Expens & Other Coment Total Cunetes Property. Plant, and Equipment Deferred Changes and Others LIABILITIES AND STOCKHOLDERS LOUITY 155 30 Current Mature of Lost Dube Accounts Payable Acore Interest Table Acord Compensation Accrued Expenses & Other Income Tax Payable 16 14 Deferred Credits & Other Nocument TE z Connon Stock Capitkin Excess of Per Value 5 sos II 15) (107 Tromy Stock Total Soldiers Equity Total Liabilities and 3. SS50 50 Exhibit The Leslie Fay Companies 1987-1991 Income Statements The Lastle Toy Companies Cated Income Statements 1987-1903 101 101000 Cost of Sales Growt Operating Expenses Sering Who Canecal and 13 Anoramio rants Total Operating OD 20 I 1585 Nouring Care (C) Income Bootes on com 143 16 S21 251 21 Income per Share Exhibit 2The Leslie Fay Companies, 1991 Industry Norms for Key Financial Ratios 3:27 Quick Race Debt tots agt fronts Receivable Travel Age of Accounts Receivable Total Tv Gro Marie Puft Morgia on Sales The greprison Bremained upbeat with the less press regarding his company's pret competitors Gestioned how the completo sustain and caring in the face of the stubborn in the al sector, weil mated that retailers were increasingly critical Payproduct fine. "Old-fashioned strony drahand overpriced were djectives that the company's reps routinely heard they made To keep his customers oppy.top printmart-dows in testes wholesale prices and grant home cumstangebotes when they found themed with quantities of the company product shapes Doncsobbied financial Analysis tracking Leslie Fay's stock any reported that the hein 1992 and chastised her for issuing a car forecast for lesey that was to Houston, We Have Problem On Friday morning. Try 23. 1993. Paul.com Concwho was a business trips. problem ...the informed his boss of the coming hoa thu Donald Kenia ad rely carried out the past years According to Collesadmitted to masterminding the although some of his subordinates had helped himinland conceal the various scam Durrection to the starting When revealing the rand to the press the following Monday denied having any chastot might have med et misrepresentasie Fay's facial data todenied that he and the other top executive of Leslie Fahalected Reisen wrongdoing He was particularly strident in defending his dere friend Pul..who had supervised Kenia and who ww directly responsible for the integrity of Leslie Fusing records Corydd porterebbe didelow anything During the following and mother an increasingly hostile burini prehouded for more details of the red while critics openly questioned whether he was being totally forthcoming regarding his lack of knowledge of Kenia's contings Responding to the critiche bed and that the than being involved in the fire he was principal victim olhold mysel personally responsible No Inmyheartofheart feed the victim now there are the victims. But the biggest victim *Such protestations did not prevent cities from using why Dance Withely accepted Leslie Foy's impressive operating results while many of the company's competitors were struggling ancially Shortly after blidly dised Keisrad Leslie's audit committenched an intensive investigation of its impact on the company's financial statements for the previous several years. The committerende come that study 3:27 company's ancial statements for the previous years. The committed Arthur Anders to be complete that Pending the outcome of the investigation cantly placed Dopory pada DO Sedan had served as Leslie Tay's since the mid-1970 and angled opinions each year the company's facial statements Following meer of the rando Seide withdrew it and print on the company's 1990 and 1991 financial statements. In the eng weeks, Leder stockholders BDO Sedans des In April 1993, DO Sedan officials contacted the securities and Exchange Commission (SEC) and inquired regarding the status of the firm's independence from Ledeyse he pending the SEC informes Sedanas independence was paded by the wiltwhich forced them to resignaday's early May 1993. Company management imately printed Arthur Andersen as Leslie's Fay new auditor In September 1991. Leslie Fay's and committee completed itselt month investigation of the counting and the resulting - report was reviewed by members of stay's beard and the mitted to the SEC and federal proces there word publicly sew key findings were to the pres. The most starting feature of the waits perver According to a company insider who read the report. There was by the cost side of the company leder for the years that The key focus of the reactivity was esse Kenia and his bardinated in the number of manufactured achtertyperied to reduce the permite finished goods and increase the company's primena During period ending physical inventories, the com manufactured the phantom venter they had previously the company's accounting records Forgingirys for nonexistent products, inflating the number of dresses of specific style en hand and bricating large amounts of bages in the were common ruses used to overstate nemenduring the period Other acting missed by Kensindded into period ending expenses and abilities prerecording'ders received from customers come sales to boost Lestare wear the end of accounting period failing to write off uncollectible receivables and ignoring discounts outstanding receivables grand to large customer experiencing slow sales of the company's products Allegedly. Kenis decided each period what montere Leslie should report le and his subordinates the adjusted Leslie Ray's accounts with redulent jumale tries to achieve that profilure From 1990 through the end of 1992, the control overstated the company's profits by appreciately Kenia ed his co-conspirators molded Leslie Financial statements so that he ancial raties would be consistent withistorical trends The lascial rate that the fraudsters paid particular attention to was Leslie Pays gross profiterentur. Por several years, the company's Bross profiterentred hevered near 30 percent les actual gross propers approximately 1990s, but Kenia relied on his sented bogel accountries inflate that matte near its historical com Excepted to the press from the wait.committee's reportage curated on www.responsibility for Leslie Fug's acting irregularities. The report indicated that there was so evidence that he and other members of Leslie Fay'shiqaretten had been aware of these relaties, but the report die these cutives for 3:28 been aware of these regulares the report on these secutives for failing to regressively pursues and suspicious circumstances they had encountered during the course of Keniastraat of these circumstances had been vily invested the earlier than may 1993. In particular the watcome questi why a vestigated Leslie /searly stable gross profit percentage in the early 1990s getest problems in other women dress manufactures and the pretty poor response to any of the company's new product offerings during Following the completion of the audit comes investigation in September 1991. Lessardel directors allowed Domains the Order responsibilities related to the company's operations. The band created cekler ostside directors te verse the company's operations while Lestie ay dealt with the aftermath of the large-scalera. The board med Paul Galbeediefoane president office and replaced him with Arthur Andersen who had been involved in the di committeestigation O Sedan: Odd Man Out In April 1993, Leslie Failed for protection from its credits under Castell the federal ruptcy code Press reports of Kelas fraudulent scheme had out all the company's the aditional debt and equity capital that needed to continues perations. By early April 1991, the price rapped by early 5 percent since the fest details of the red become public to marr The company's plummeting stock price and the mounting crecimofits offices in the business press ricordanowsuits by angry sted-bolders in there are and the company's time de 100 Set The lawsuits that named DO Sedat as a defendant changed at the firm had been at least redes indigestias periodical statements during the early 1990s. Hewardshire press that leasfinancial dat had been plete with redag These red flags included impossible trends in the company's statements and unreasonably generous bespaid to top executives brunes linked directly to the red carings Leeu reported each successive period. For 1991. Den received total salary and buses of 53.6 million, three times more than the 1991 compensatie Gaiborne's whese company reported a more than double these of Leslie BD Sedan officialschafedat published reporting their Leslie Faydi These officials insisted that BDO Sedan was being indicted in the press on the basis on and complete Information. These same individuals also maintained that Leslie Fay's top management principally her the of the responsibility for the massive rol During various court proceedings following the dinosure of the Leslie Fayfmany parties questioned the objectivity of the forenie investigation supervised by Leslie Pays de committee that had effectively indicated on these skeptis sustel that the members of the audit committee had been reluctant critic Banca Tosquelchach criticism the federal judge presiding over Leslie Fay's bankruptcyfing appointed as independentamine Charles to prepare another report on the details of the rad Sic was also cred with in the individuals responsible for the freed and those responsible for boling tower In August 1991, the US Bankruptcy Couted the so-called Slow Report this document correberited the key findings of the audit committee investigation. Similar to the audit committee repet the Sport largelyesented the examines report condoles there is no evidence to suggest that we damsexist against any members of Leslie Fay's current management or its bound The Swo. Peport went on to suggest that although there were likely viable durims against former company estives Kenia and based upon presently available information the limited these individuals made it ecemically infeste for the bar court to pursuindicted se 3:28 cotto purse the meaty, the part indice quality of Do Sediments of Leslie Party ating that the may be claims worth pursuing against ... Scdman and that Sed egy in performing account for Lay Pollowing the release of the SportLeela teholders filed a large civil lawsuit again. Sed in the federal bankruptcy Courts. At approximately the same time, bo Sedan filled aalastele Ray's principal officers, including lates, commenting the latter, Semasa for the frequently upon the shoulders of Leslie Pay's cutest noted that they had been intentionally led by the company Leslie Pay's management responded immediately to the news tuto Sedman had named Johnnid fellow effice defendants in a large civile mbotaned and unfounded allegations made today by Semanare a desexample of Testy and are dearly as attempt by the accounting first divertention from its own apparent negligence by blaming others." Epilogue In July 1997.a federal judge approved a 34 million sentiment to the large number lawsuits filed by Ledie Pays stachelders and credits the company, executives and SedmanRDO Sedman contributed to these although the firm reported that it was agreeing to the timely because it was the most comical and expeditious way to put this matter behind the Lade Pay emerged from federal bankruptcy court Over the next years, the company returned to a profitable condition before being purchased in late 2001 nement fund. A few months later, in April 2002. Jahontacted achievement award at the annual calage Award yupo by On October 31 1996, federal prosecutoriela 21-cut fraud inimesi Zaiban. The specific charges included conspirary.waling tale statements to the bank trand and wire trand Unite the public three years earlier Dealdad broken down under relentless quoing by federal and add that Lobbformer bass, had been the architect of the Ladie Bayfred Accedi Kelas testimony one and directed every other Because deaty Keland several of his words agreed to make the carmos number of fraudulent atrisins Pays records that he had demanded. Colladale compelled Kelato acceptfall responsibility for the accounting irregularities when it became apparent in late Following a series of lengthy and fiercely contested pretral bearing cane was finally heard in federal court in the summer of 2000.com 18 of the 21 frasad countled against him. History immediately applied the gally verdict. The res principal contention during the appeal was that there was physical evidence to link their client to the fraud instead they mustained that Cotion had hinged almost entirely upon the veracity of Kena's testy The federal judge who presided over Doppel did not dishes regularites. Despite that fact, the judge denied peal. The edge carved a substantial amount of circumstantial evidence had been pred during studying the evidence in painting detail the judge ruled that it was much more clatent with Kanda's testimony than that Bow A key factor contributing to the judge's decision was the usual relationship that existed between Boland during their longtem with the Paya that had been documented and discussed at length during the trial. The gated that Colbertad dominated through intimidation and in the piombed the case, the judge referred multiple occasions to neplade during 1012 demonstrate how.completely had controlled in forcing Klatot responsibility for an accountserrur thuthad been discovered in Bayan Records Costed that Kenia tell another company cutie, Tam O January 21, 2002 edhe 3:28 cendants in a large and lite tanned and und algade by Sida med revient history and are clearly an empt by the accounting first diver attention from apparet negligence by blamingo I Epilogue In July 1997, a federal judge approved a 34 million selement to the large number Lawsuits filed by Leslie Ray's stockholders and credits against the company is executives, and to Sedman. RDO Sedan contributed 58 million to the settlement pool although the firm reported that it was agreeing to the timestay because was the Fay emerged from federal han eruptcy court. Over the next several years, the challe company returned to a profitable condition before being purchased in 2001 byla nement fund. A few months later, in April 2002. Jahoma eelved achievement award at the annual American Image Award a given spored by the October 31 1996, federal prosecutors filed a 21-fraud indictment cob The special charges include comprato the SEC Dank fraud and wirefraud Unknown to the public three years earlier. Donald had broken down under relentless questioning by federal grandaid that Lalbahis former bass, had been the architect of the ladie Fay rand According Kenlastest had overseen and directed every major Because of intimidating personality, Kenia and all his bedehad agreed to make the carmos number of fraudulenteri Ladie Pays cards that he had demanded had ale compelled Kela total reponsibility for the accounting irregolarities when it became apparently 1993 that there would be Following a series of lengthy and fiercely contested pretral hearing cane was finally heard in federal court in the summer of 2000, was comida 18 of the 21 fraud countled against him. History.me pealed verdict. The money principal contention during the appeals that there we physical cedence to think their client to the fraud. Intradhey maltained that the Cention had hingedalt entirely upon the veracity of Beste The federal de who presided over Dupealid display principal contention. Throughout the fraud the former Challenge leaving incriminating physical evidence that linked him directly to the accounting substantial andet af circumstantial evidence had the presented during the mother studying the evidence in painting detail the judge ruled that it was there comitent with many than that Aley factor contributing to the judge's decision was the relations that existed between Bolibar and Kenia during the long tenure with Leslie Paya that had been documented and discussed at length during the trial. The dated that Lesba, hadde en hgh intimidation and earn the piche the case, the judge referred multiple accasions to an eplade during 1992 demonstrate how completely Bold controlled Kesan facing to take pochty for an error that had been in Las record. Doted that tell another company. Tam On January 21, 2002, almost eactly nine years after the news of the Lady wurfaced in the press Vaalwassemenced tree years in federal his role in plotting and overseeing that allowed for personal In 1999 caminants of only $17.000 was alfined 900. Mengapa overturn his conviction reported to the federal correctional facity County, Peraylania in carey September 2003 te beginning is nine years exchange for his testimony a Bolob, Donald Kenia was allowed to play two counts of making false statements to SEC. 2001, Kelawas sentenced to the years in the wo Federal Price Camp in Mongemery, Pennsylvania 1. Prepare common-sized financial statements for Leslie Fay for the period 1987-1991. For that same period, compute for Leslie Fay the ratios shown in Exhibit 2. Given these data, which financial statement items do you believe should have been of particular interest to BDO Seidman during that firm's 1991 audit of Leslie Fay? Explain. 2. In addition to the data shown in Exhibit 1 and Exhibit 2, what other financial information would you have obtained if you had been responsible for planning the 1991 Leslie Fay audit? 3. List nonfinancial variables or factors relevant to a client's industry that auditors should consider when planning an audit. For each of these items, briefly describe their audit implications. 4. Paul Polishan dominated Leslie Fay's accounting and financial reporting functions and the individuals who were his subordinates. What implications do such circumstances pose for a company's independent auditors? How should auditors take such circumstances into consideration when planning an audit? 5. Explain why the SEC ruled that BDO Seidman's independence was jeopardized by the lawsuits that named the accounting firm, Leslie Fay, and top executives of Leslie Fay as codefendants