In 1993, Leslie Fay Companies, manufacturer of women's apparel, filed for Chapter 1 1 bankruptcy protection shortly after a scandal erupted over fraudulent accounting information. As reported in The Wall Street Journal (March 28. 1995, p. Bl. B16). the company's audit committee report sharply criticized top management, suggesting that "it would have been difficult for senior management not to spot the extensive inventory and sales fraud."

There were numerous ways in which Leslie Fay committed the fraud, according to the report: To boost sales and lower costs, mid-level company officials forged inventory tags, ignored expected inventory shrinkage, multiplied the value of items in inventory, improperly inflated sales, and made up phantom inventory. These officials also constantly altered records to meet sales targets. In March 1995. Leslie Fay's independent auditors. BDO Seidman. filed charges against Leslie Fay management, suggesting a cause of the fraudulent activity was due to senior management's adoption of unrealistic budgets: "Senior management created an environment which encouraged and rewarded the cooking of Leslie Fay's books and records" (The Wall Street Journal. March 29. 1995).

Required: 1. Describe the parties who were harmed or helped by this fraud. 2. Explain how adopting unrealistic budgets may have contributed to the fraud. 3. Why do you think the independent auditor filed charges against its former client?