Audit case with the highest compensation in American history-* * * Audit case of Datong Fund Management Co., Ltd. Audit case introduction * * * Datong Fund Management Co., Ltd. (hereinafter referred to as * * * Datong Company) has a scale of about 500 million US dollars, and its boss is Cornford. Makandi King (King for short) is the owner of King Resources Company (King Company for short) and a billionaire. At the beginning of 1968, Cornford and Guinness began to cooperate and reached the Aga-Bulko agreement, that is, the company will purchase the oil and gas industry from Guinness Company and set up a natural resource capital account (hereinafter referred to as resource account) to manage these investments. Although the two sides have not signed any formal contract, it has been clearly recorded in the minutes of the board meeting with the company that "Gold Company will provide natural resources industry for the planned natural resources fund account and settle it at normal prices, and these sales prices will be more favorable than those of more than 200 buyers in industry or other industries". * * * A manager of the same company also confirmed the core content of the agreement, that is, the gold company will sell the natural resource industry with the company at the cost price * * *, which includes the management expenses and reasonable profit rate when acquiring the industry, and these profit rates are generally around 7-8%. Initially, Cornford agreed to buy an oil and gas industry worth about $65.438 billion from Guinness. However, by the end of 1969, the glib king persuaded the managers of the same company to buy oil and gas industry worth about $ 65438+ billion from his company. Unfortunately, it finally fell on the shareholders of the same company. In these transactions, Kim failed to fulfill the Aga-Bulko agreement. According to the later court investigation, Jin often buys cheap oil and gas industries and then sells them to the same company at a high price, sometimes the price is more than 30 times the original cost. A few years later, the continuous decline of stock price and the inferior natural resources sold by Gold Company forced this huge company to go bankrupt. * * * Large-scale civil litigation disputes caused by company liquidation. One of the main defendants is Andersen Certified Public Accountants. They used to provide audit services for * * * Tong Company and Gold Company. The person suing Andersen Certified Public Accountants is John Earle, trustee of bankruptcy liquidation of the company, who is a partner of Tachi Ross Certified Public Accountants. John sued Andersen for failing to disclose the information that the company was cheated by Guinness to the managers of the same company. When the trial results were announced, Andersen Certified Public Accountants became the highest compensation victim of accounting firms in American history. I. The dual relationship between Andersen Certified Public Accountants and * * * Datong Company and Jinshi Company. Andersen Certified Public Accountants participated in the audit of the annual financial statements related to * * * Datong Company. Based on the size, characteristics and complexity of the company, the Geneva office pays special attention to its audit work. New york office is responsible for signing the audit power of attorney. And with the company's annual financial statements to sign the audit report of * * *, responsible for the audit results. Denver office played an important role in company audit. According to the requirements of its partners in new york Office, its auditors conduct extensive audit procedures every year to verify the accuracy of the year-end balance of the resource account. In addition, the Denver office also audited Guinness, which is headquartered in Denver. In addition, the partners and senior managers in charge of the audit fund company are also responsible for supervising the audit of the resource accounts of the same company. * * * A key question raised by the bankruptcy administrator of the same company in the lawsuit against Andersen Accounting Firm is whether the firm knows that * * * the same company paid too high a price when buying the industry from Kim's company. The evidence collected by the court shows that the auditors of Andersen's Denver office did know that the resource accounts of the same company were actually managed by Kim's company. The audit working paper also specifically pointed out that Jinshi Company has "absolute free disposal right to purchase oil and gas industry" for the resource account. The Denver office also has complete free access to relevant information such as the industrial cost and marginal profit of the natural resources sold by Gold Company to the company. Another important issue related to the lawsuit is when the auditors of Andersen Certified Public Accountants knew that * * * bought the oil and gas industry from Guinness at a high price. Andersen Certified Public Accountants issued an audit report on the financial statements of * * * Tong Company 1968 on February 5, 1969. Therefore, the court is particularly interested in knowing the company's understanding of the transaction price of the natural resources industry between the two companies so far. The last question involved in the lawsuit is that Andersen Certified Public Accountants knew and participated in several so-called revaluation transactions arranged by Gold Company for the same company? Evidence shows that many prices are arranged by the gold company.

The revaluation transaction is deceptive. For example, Gold Company claimed on at least two occasions that it had found a third party and was willing to buy a small part of the property rights belonging to the same company or Gold Company in an oil and gas industry at a price much higher than the fair market price. However, without the knowledge of * * * and the company's managers, Gold Company secretly signed a "subsidiary agreement" with the buyers in these industries in advance to ensure that the latter would not suffer any losses in these transactions. The existence of subsidiary agreements means that revaluation transactions are not normal public transactions, so they cannot be used as an objective basis for establishing fair market prices of these natural resources industries. Obviously, these fraudulent revaluation transactions were carefully arranged by the gold company to convince the managers of the company that their resource accounts were increasing in value. Of course, these revaluation transactions obviously overestimate the net asset value of the shares of the same company, which on the one hand makes the investors who withdraw their shares get excess returns, on the other hand harms the interests of those investors who hold shares for a long time. Second, the audit court records of Andersen Certified Public Accountants on the financial statements of * * * Company 1968 show that Andersen Certified Public Accountants realized the high risk of auditing * * * Company. These risks are mainly reflected in the large-scale investment in the natural resources industry. In the annual audit working paper of * * * Tong Company 1968, our firm wrote, "In any natural resource transaction, the property right purchased by * * Tong Company is a part of the property right originally owned or owned by Gold Company at the same time." This is very abnormal. The trial record also mentioned that since 196 1, "as the audit client, Kim has caused many serious troubles to Andersen Certified Public Accountants." These troubles make Andersen Certified Public Accountants realize that it is necessary to conduct a detailed review of the business dealings between * * * and Gold Company, and pay more attention to several suspicious economic businesses of Gold Company. In the 1968 annual audit of * * * com, the auditors of the Denver office of Andersen Certified Public Accountants analyzed in detail the price of the natural resources industry sold by Gold Company to * * * com. The analysis results show that the market price of gold company to the same company is much higher than that to other customers. The recorded gross profit margins of five natural resources industries sold by Gold Company to the same company are 98.6%, 98.7%, 56.7%, 58% and 85.6% respectively. Because most of the industries are sold to the same company, and Kim's company has only held it for a short time, these gross profit margins are particularly high. After summarizing the understanding of Andersen Certified Public Accountants on the price policy of Kim's sale of the industry to * * * Tong Company, the court came to the following conclusion: "We have reason to believe that before Andersen Certified Public Accountants signed the audit report of * * * Tong Company on February 5, 1969, we knew that * * * Tong Company purchased the natural resources industry in 1968. Although Andersen Certified Public Accountants has mastered these facts, there is still a long-standing debate in the trial of the case, that is, whether Andersen Certified Public Accountants can and should apply this information to the company's audit. The key issue in the debate is whether the firm can audit the natural resource investment of the same company by using the price information obtained from the audit of the company where Jin is located on the grounds of confidentiality to customers. On this issue, we should pay attention to the following facts: * * is closely related to the audit of the company and the audit of the gold company, and the audit of the * * * resource account is completed by reviewing the accounting records of the gold company. In some cases, Andersen Certified Public Accountants even conducted the audit of Guinness Company and the audit of resource accounts at the same time. Therefore, from the audit files set up by the firm for the Guinness Company and the resource account and the relevant evidence collected during the audit, it can be seen that the firm is very clear about the long-term business relationship with the company and Guinness Company. Another key issue in the audit is the acceptability of the so-called value revaluation transaction, that is, by selling a small part of the natural resources industry, the fair market price of the rest is determined. 1968 12, Gold Company sells to Hawkes Love Company 10% natural resources industry is the same company. Hawkes Love is also an audit client of Andersen Certified Public Accountants. * * * According to this sale, the company confirmed that the investment appreciated by about 900,000 USD. The company doubts the rationality of this sale. Because * * * and the company have held the industry for a short time, and there is no new geographical discovery, it is impossible to prove that the value of the industry exceeds the cost at the time of acquisition. In addition, * * * The same company inferred from the sales situation of the industry 10%, and the remaining 90% also increased in value. Is it convincing enough? Later, it was found that there was a "subsidiary agreement" between Kim and Hawkes Love Company. Kim provided Hawkeslov with a deposit when purchasing its industry, and exempted the company from all obligations of paying the purchase price. Phil Ka is a partner in the Denver office of Andersen Certified Public Accountants, and is responsible for the capital of Guinness and * * *.

Audit of source accounts. 1969 65438+ 10, he found that the transaction of Hawkes Love Company was not a normal sales business. Phil Ka told this information to john robinson, a partner in the new york office of Andersen Certified Public Accountants. According to court records, the "top partner" within Andersen Certified Public Accountants had a heated discussion on Hawksloff's transaction. Due to some reasons unwilling to disclose, the firm finally decided not to tell the fact that the transaction between * * * and our company and Hawkes Love Company was illegal, and on February 5th 1969, it issued an unqualified audit report on the financial statements of * * * and our company 1968+3 1. Three. Audit of the financial statements of CompanyNo. 1969 by Andersen Certified Public Accountants When making the annual audit plan for CompanyNo. 1969, Phil Ka, a partner of Denver Office, formulated a set of new audit standards to guide the audit of subsequent revaluation transactions of CompanyNo. * *. Obviously, the audit guide was formulated out of consideration for the suspicious transactions of Hawkes Love Company in the last year's audit, and * * * will undertake greater responsibility for the annual audit of 1969 together with the company. According to the court evidence, in the annual audit of * * * Company 1969, the Denver office should be responsible for the accuracy of the cost and market price of the resource account. The partners in the Geneva office of Andersen Certified Public Accountants issued a severe warning to Phil Ka, saying that it is inappropriate to disclose only the valuation method of the company's investment in natural resources without fairly reflecting all the real situation. 1969165438+1October, Filka drafted a memorandum on auditing standards, requiring auditors to follow these standards when reviewing future revaluation transactions with the company. The memorandum was reviewed by the regional director in charge of the West Coast audit business of Andersen Certified Public Accountants and the managing partner of the Chicago headquarters, and both of them agreed. * * * The management of the same company also received a copy of the memorandum. At the end of 1969, Gold Company wanted to sell part of its rights and interests in the Arctic industry (most of the rights and interests of this industry had been sold by Gold Company to * * * Company earlier), and it was necessary to re-evaluate the value of this part of rights and interests. Relevant personnel of Gold Company understand the specific contents of the memorandum of audit guide, and strive to make the revaluation transaction conform to the key terms of the memorandum. In the end, Gold Company sold the shares of Arctic Industry slightly below 10% to McCann, the major shareholder of Louisiana Oil Company (which was experiencing a serious financial crisis at that time). This transaction made the same company mistakenly confirm that the value-added of its Arctic industry exceeded 25%, and the total value-added was about 65,438+190,000 USD. However, without the auditor's knowledge, Kim signed a subsidiary agreement with McCann in advance, just like his previous deal with Hawkes Love. Phil Ka was very cautious when he realized that the revaluation of Arctic industry had a very significant impact on the company's market value. According to court records, Phil Ka reported this situation to the regional director in charge of the West Coast audit business of Andersen Certified Public Accountants. He said that the review of the revaluation transaction by the Denver office alone could not provide enough evidence to prove that the market value of the same company's investment in the Arctic industry has increased. The district director agrees with this view. Phil Ka also pointed out that the Chicago headquarters of Andersen Certified Public Accountants should exercise the final decision on whether to approve the appreciation of the company's natural resources investment value and bear corresponding responsibilities. In fact, the senior partners of Andersen Certified Public Accountants did discuss these investments for a long time, and the focus of discussion was whether the fair market value of these investments could be affirmed or denied. However, in the end, the auditors issued a qualified audit report on the financial statements of * * * Tong Tong Company on June1969+February 3 1. When evaluating the audit of the revaluation transaction of Arctic industry, the judge paid special attention to the fact that the accounting firm had mastered the transaction later known as blakely Walcott, which increased the net income of 1966 Gold Company by nearly 40%. In blakely Walcott's transaction, King and the buyer reached an illegal secret subsidiary agreement in private. The transaction is similar to Hawkes Love Company and McCann Company. Judging from the audit of Gold Company 1966, Andersen Certified Public Accountants has doubts about the nature of the transaction. According to the work report, blakely Walcott's transaction is specious and seems to be just a way to increase the book value of assets. Although the auditors raised their concerns, the company finally accepted the accounting treatment of the transaction by Kim's company. Andersen Certified Public Accountants made this decision because it received a guarantee statement from Kim. In the statement, Jin categorically denied the existence of any subsidiary agreement in blakely Walcott's sales business, and guaranteed that the company's management personnel and the economic business they carried out were legal. Managers and key employees have never been involved.

Any business activities of the Ministry of Economic Entities to buy and sell natural resources from Jinshi Company, whether these activities are direct or indirect. At the beginning of 1970, before signing the annual audit report of * * * Tong Company 1969, the Denver office of Andersen Certified Public Accountants decided that blakely Walcott's transaction was a scam, thus proving that the statement issued by Jin in 1967 was false. This discovery makes the authenticity of all relevant audit evidence collected by our firm from Jin's company questioned, which is used to support the credibility of the financial statements of * * * and the company 1969. In particular, the evidence used in the statement to prove that the company's investment in the Arctic industry has increased significantly is even more incredible. However, the court found with regret that despite the latest information about blakely Walcott's transaction, Andersen Certified Public Accountants continued to rely on the audit evidence collected from Guinness and Guinness Company, which was related to the annual audit of * * * and 1969. After the revaluation of Arctic industry in June 1969 and the authenticity of blakely Walcott's transaction was recognized, Andersen Certified Public Accountants continued its audit work, and obtained a guarantee statement that "the sales of Arctic industry are true and normal transactions" from the Treasury, and another similar guarantee statement from McCann. However, the company did not ask McCann about the subsidiary agreement. Before signing the audit opinion on the financial statements of the company 1969, an article published in The Wall Street Journal once again caught the attention of the auditors of the firm, suspecting that there might be an undisclosed subsidiary agreement in McCann's transaction. For this reason, the firm has repeatedly asked Guinness to further determine whether the transaction is true, and Guinness has once again stated that the real situation of McCann's transaction is exactly the same as that originally told to the firm. Four. * * * The accusation of the bankruptcy administrator of the same company against Andersen Certified Public Accountants and the court judgment * * * The accusation of the bankruptcy administrator of the same company against Andersen Certified Public Accountants is that the firm allowed the same company to be defrauded by the gold company; The company did not tell the manager of the same company the cost and price information collected by the Denver office from Guinness; Failing to inform the Arctic industry that the transaction is deceptive; This transaction does not meet the requirements of the auditing standards set by the company. * * * The same company has repeatedly claimed that if the firm discloses its views on the essence of the Arctic industry transaction, they will not use part of the property rights of the Arctic oil and gas industry sold by Gold Company as the basis for evaluating the value of the company's rights and interests in this industry. Finally, the trustee of * * * also accused the firm of failing to fulfill its obligations as stipulated in the power of attorney and failing to inform the management of * * * of any misconduct found during the audit. Part of the power of attorney for audit business is as follows: "In order to perform our duties, we will review your company's balance sheet, net assets and investment statements as of 1968 12 3 1, as well as the relevant profit and loss statement, net assets appreciation and change statement for the year, so as to express audit opinions on financial status and operating results. Our review will be conducted in accordance with generally accepted auditing standards, including all procedures that we think are necessary in this case. These procedures will be used alternately, including reviewing and testing accounting procedures and internal controls, checking written evidence to support transactions recorded in the accounting system, and selectively writing letters to customers, lenders, lawyers, banks and other units and individuals to directly confirm the balance of certain assets and liabilities. Through censorship, some corruption and similar misconduct may be exposed. But our audit procedures are not designed for this purpose, and it is impossible for us to review enough transactions to ensure that all corruption and other misconduct are exposed. Generally speaking, exposing these behaviors mainly depends on the company's internal control system and effective supervision of accounting procedures and records. Of course, we will inform you of any misconduct that we have noticed as soon as possible (an important statement directed by the court). " The lawyer of this firm refuted the accusation that * * * is the bankruptcy administrator of the same company. First, it would violate the confidentiality principle of auditors to inform the same company of the information obtained from the gold company. Second, it insists that the sale of part of the property rights of the Arctic industry of the gold company is the basis for evaluating the market value of the industry owned by the same company, and the board of directors of the same company should bear the main responsibility. There is no evidence before the transaction, and there is little evidence after the transaction, which shows that the revaluation transaction is deceptive. In addition, the plaintiff did not prove that the revaluation transaction led to a significant increase in the investment value of Arctic industry of the same company. Third, the firm claimed that it did not find any transactions or activities that could be called "misconduct" during the audit. Of course, it is impossible to report misconduct to the company management. The court held that the price sold by Kim Company to * * * Company was too high, and the firm should report to the management of * * * Company. The court held that the firm was fully aware of the fact that * * * was defrauded by the gold company.

It is further pointed out that Andersen Certified Public Accountants has not made clear the different relationships between the relevant parties and the transaction prices between them, which has a great impact on the fair expression of * * * and the company's financial situation. The court held that it was the company's responsibility to find out whether the sales of Arctic Industries were publicly traded. Have you met the requirements of the audit guidelines supporting revaluation transactions formulated in June 1969 1 1? The firm led to the wrong decision of the company, because the audit team had reason to doubt whether the sales of Arctic industries were publicly traded. Moreover, from all the facts, it is reasonable to explain that the firm should know that the revaluation of 1969 Arctic Industry is false from the method to the result, but it still insists on misleading and incomplete information disclosure? . Although the management of the company should bear the main responsibility for business decision-making, when all aspects of economic transactions are so chaotic that it is impossible to understand the real financial situation of customers, auditors must inform customers of the situation. The court of breach of contract held that the firm failed to fulfill its obligations stipulated in the power of attorney, that is, it should inform the company of any misconduct found in the audit process. The court ruled that the revaluation of Arctic industry was fraudulent. In making this judgment, we mainly considered three aspects: (1) Andersen Certified Public Accountants knew that the blakely Walcott transaction conducted by 1966 was fraudulent before signing the audit opinion on the accounting statements of 1969. ② The firm knew that McCann, which was facing financial crisis at that time, did not have the financial strength to acquire 10% Arctic Industry. ③ The company didn't ask McCann whether he had a private subsidiary agreement with Kim in the Arctic industrial transaction. In the case of * * * and the company, two aspects are of special significance to the CPA industry: one is the confidentiality principle of auditors; Second, issuing a qualified audit opinion report on the annual accounting statements of * * * Tong Company 1969 does not relieve its firm of its legal responsibility. When the firm invoked the principle of auditor confidentiality to seek protection, it ignored the fact that the firm used the accounting records of the gold company during the audit and repeatedly asked the gold company to provide information about the relationship between the gold company and the company. Assuming that the principle of confidentiality should be observed in this case, the auditor can: ① strongly demand a customer to make the necessary disclosure; (2) The fact of disclosing some invalid information to other customers; ③ Quit the audit of one of the customers. However, the company did not take any of these measures. Since Andersen Certified Public Accountants signed a qualified audit report on the accounting statements of * * * and Company 1969, the judge's judgment and the qualified opinions in the audit report did not fully show the management's doubts about the valuation of our natural resources industry, nor could it completely avoid the substantial damage of * * * and the company's economic interests. 198 1 In the summer, after 8 weeks of trial and 2 weeks of review, Andersen Certified Public Accountants was awarded $80.79 million (later reduced by about100000). This is the highest salary audit case made by an accounting firm in American history.