The main focus of this case is on the fraudulent inflating of a restructuring reserve at Moonstay Corporation in late 1996. This technique was actually just one of the many aspects of the massive financial reporting fraud that took place while Moonstay was being run by controversial CEO "Whipsaw" Bill Smith. The case also deals with Moonstay's unnecessary accrual of a contingent liability. You are asked to discuss the role played by Moonstay's external auditors. This case illustrates how a company can manipulate its reported income for two or more years through the use of an accounting game called restructuring reserves. The game was played at a very high level at Moonstay Corporation during 1996 and 1997, during which time CEO Whipsaw Bill Smith was Moonstay's chief executive officer (CEO). INTRODUCTION After a spectacular though brief tenure as CEO of Stormish Paper Company, which ended with the sale of Stormish to Kinter Corporation for $9.4 billion, Bill Smith, known as Whipsaw for his fondness for firing people, took some time off and then agreed to become CEO of the troubled but respected con- sumer products company, Moonstay Corporation. The market capitalization