Principles of auditing: I’m doing a research paper on Leslie Fay Company and the

Question

Principles of auditing:

I’m doing a research paper on Leslie Fay Company and the fraudulent activity that occurred.

The Leslie Fay Company, which was indicted for fraud on the allegation that it, was falsifying invoices to show an increase in profits. Furthermore, the falsification prompted shareholder to make an investment in the company based on the numbers reported in Company’s financial statement

The exact question I’m being asked to write on is stated below as number 1.

1. Your report must describe the issues surrounding the company and any company policies in relationship to the impact those might have on public audits/accounting.

I’m struggling with the 2nd part of the question. Can you assist with providing some information around general company polices in relationship to the impact that those polices might have on public audits/accounting? Thank you!

Explanation / Answer

The Leslie Fay Companies yesterday released the results of an investigation into the accounting scandal that has bedeviled the women's clothing maker since January.

The audit of the company's books showed that the manipulations falsely inflated Leslie Fay's after-tax profits by $62 million between the fourth quarter of 1990 and last January. It is now operating under the protection of Federal Bankruptcy Court.

The irregularities also masked a drop in sales to $772.1 million last year from $855.2 million in 1990.

John S. Dubel, the chief financial officer, said the company had hired a new team of senior-level executives to handle accounting, treasury functions and financial planning to guarantee against scandal in the future.

Separately, people familiar with the designer Donna Karan's plans to take her company public said she might postpone a stock offering because the weak market for apparel offerings coupled with Leslie Fay's bad news had tainted investors' appetite for apparel stocks. But the Donna Karan Company said it still intended to go through with its offering sometime in the next two or three months. Reasons Still Murky

While the statement released by Leslie Fay yesterday provided restated financial results for the last three fiscal years and a summary of the conclusions of an investigation into the scandal by the independent audit committee of the board, it did not go any further toward explaining how and why the false entries had occurred.

Wall Street and Seventh Avenue have been -- and apparently will remain -- puzzled about why Donald F. Kenia, the corporate controller who disclosed the problems, would have juggled the numbers, as the company says he did, when he did not stand to profit by doing so.

Mr. Kenia's lawyer, Bradley Beckman of Philadelphia, did not return a call to his office yesterday.

The company said Mr. Kenia, who remained on the company payroll for almost eight months after revealing the scandal to help auditors unravel the plan to inflate profits and sales, was dismissed. But Mr. Dubel, said the company "may continue to utilize certain services of Mr. Kenia."

Paul F. Polishan, the former chief financial officer of the company, was also dismissed and will not be paid for the remainder of his employment contract, which expires in 1996. No one answered the telephone at Mr. Polishan's house yesterday.

The audit committee criticized Leslie Fay's senior managers "for not having acted aggressively in response to information available to it that may have led to the discovery of the accounting irregularities."

The company and its officers are already the target of a class-action lawsuit brought by shareholders, who could use the suggestion in the board's summary yesterday that executives could have unearthed the scandal more quickly as legal ammunition.

John J. Pomerantz, the son of Fred Pomerantz, the founder of Leslie Fay and the company's largest shareholder, will continue as chairman and chief executive, although he will turn the responsibility for the financial functions over to Michael J. Babcock, the chief operating officer.

The revised numbers clearly detail how difficult the company's business has been over the last few years. In the six months ended July 3, the company lost $37.8 million, or $2.02 a share, including costs of reorganization and the investigation. Sales in the period were $337.7 million. The company has not yet restated its quarterly financial results for 1992.

Leslie Fay stock rose 62.50 cents yesterday, closing at $3.375 a share on the New York Stock Exchange.

The company said weak sales of apparel, which have afflicted all clothing manufacturers, resulted in lower profit margins. "The apparel business is not the most terrific industry in the United States today," Mr. Babcock said.

The company said it hoped the actions it was taking to reduce expenses, reposition its brand names and strengthen accounting and financial controls would result in a better performance the rest of the year.

The company is banking on its Theo Miles collection, a higher priced line that made its debut in department stores this fall, to help restore its business. Laura Pomerantz, Mr. Pomerantz's wife and a Leslie Fay board member, has said she expected Theo Miles to be a $100 million business within a year of its introduction.

Retailers say Theo Miles initially has not been the best seller Leslie Fay promised. But Mr. Babcock said it was too early to tell how the line would sell in stores. "The softer pieces and knits are selling very, very well," he added.

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