The audit case of mutual fund management co., ltd, the highest compensation case in American history, is introduced. The scale of mutual fund management co., ltd (mutual company for short) is about 500 million dollars, and the company's 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 joint venture company will purchase the oil and gas industry from Guinness, and set up a natural resource capital account (referred to as resource account) to manage these investments. Although the two parties have not signed any formal contract, it has been clearly recorded in the minutes of the meeting of the board of directors of the joint company that "Gold Company will provide natural resources industry for the planned natural resources fund account and settle it at normal price, which will be more favorable than more than 200 buyers in industry or other industries". A manager of the joint company also confirmed the core content of the agreement, that is, Jin's company will sell the natural resource industry at the cost price, including the management expenses and reasonable profit rate when acquiring the industry. These profit margins 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 ordinary companies to buy oil and gas industries worth about $ 65438+ billion from his company. Unfortunately, it finally fell on the shareholders of ordinary companies. 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 ordinary companies at high prices, sometimes the price is more than 30 times the original cost. A few years later, the continuous decline in stock prices and the inferior natural resources sold by Gold Company to ordinary companies forced huge ordinary companies to go bankrupt. The liquidation of the joint venture company triggered a large-scale civil litigation dispute. One of the main defendants is Andersen Certified Public Accountants. They used to provide audit services for ordinary companies and Guinness. The person suing Andersen Certified Public Accountants is John Earle, trustee of bankruptcy liquidation of the common company, and he is a partner of Tachi Ross Certified Public Accountants. John sued Andersen for failing to disclose the information that the company was cheated by Kim's company to the management of the common 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 the common company and Guinness Company. Three Andersen Certified Public Accountants participated in the audit of the annual financial statements related to the common company. According to the size, characteristics and complexity of the joint company, the Geneva office pays special attention to its audit work. New york office is responsible for signing the audit power of attorney. And sign the audit report of the annual financial statements of the joint venture company and be responsible for the audit results. The Denver office plays an important role in the audit of the joint venture company. 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 management responsible for the audit of the gold company are also responsible for supervising the audit of the common company's resource accounts. A key question raised by the bankruptcy administrator of the common company in the lawsuit against Andersen Accounting Firm is whether the firm knows that the common 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 account of the common company was 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 full freedom to check the industrial costs and marginal profits of natural resources sold by Guinness to ordinary companies. Another important issue in the lawsuit is when the auditors of Andersen Certified Public Accountants learned that the joint venture company had acquired the oil and gas industry from Guinness at a high price. Andersen Certified Public Accountants issued an audit report on the financial statements of the joint venture 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 whether Andersen Certified Public Accountants knew and participated in several so-called revaluation transactions arranged by Gold Company for the common company. Evidence shows that many prices are arranged by the gold company.

The revaluation transaction is deceptive. For example, on at least two occasions, Gold Company claimed to have found a third party who was willing to buy a small part of the property rights of an ordinary company or Gold Company in an oil and gas industry at a price far higher than the fair market price. However, without the knowledge of the management of the joint venture company, Jin 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 Kim's company to convince the managers of ordinary companies that their resource accounts are increasing in value. Of course, these revaluation transactions obviously overestimate the net asset value of common stock. On the one hand, investors who withdraw their shares have gained excess returns, on the other hand, they have harmed the interests of those investors who have held shares for a long time. 2. The court records of Andersen Certified Public Accountants on the financial statements of the joint venture company 1968 show that Andersen Certified Public Accountants realized the high risk of auditing the joint venture company. These risks are mainly reflected in the large-scale investment in the natural resources industry. In the Joint Company 1968 Annual Audit Working Paper, the firm wrote, "In any natural resource transaction, the property right purchased by the joint company is part of the property right originally owned or owned by the 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 made Andersen Certified Public Accountants realize that it is necessary to conduct a detailed review of the business dealings between the joint company and Gold Company, and pay more attention to several suspicious economic businesses of Gold Company. In the annual audit of 1968 of the United Company, the auditors of Andersen's Denver office analyzed in detail the price of the natural resource industry sold by Gold Company to the United Company. The analysis results show that the market price of gold company to ordinary companies is much higher than that to other customers. The recorded gross profit margins of five natural resources industries sold by Gold Company to the common company are 98.6%, 98.7%, 56.7%, 58% and 85.6% respectively. Because most industries are sold to common companies and gold companies only hold them for a short time, these gross profit margins are particularly high. After summarizing the situation that Andersen Certified Public Accountants grasped the price policy of Kim's company selling its industries to the common company, the court came to the following conclusion: "We have reason to believe that before Andersen Certified Public Accountants signed the audit report of the common company on February 5, 1969, we knew the price paid by the common company when it bought natural resources industries on February 5, 1968, the cost of Kim's company buying these industries and the profits in these transactions." 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 audit of the common company. The key issue of debate is whether enterprises can use the price information obtained from the audit of gold companies to audit the natural resources investment of common companies on the grounds of keeping secrets from customers. We should pay attention to the following facts: the audit of the joint company is closely related to the audit of the gold company, and the audit of the resource account of the joint company 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, it can be seen from the audit files set up by the firm for Guinness Company and the resource account and the relevant evidence collected in the audit process that the firm is very clear about the long-term business relationship between the common 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 a joint company. Hawkes Love is also an audit client of Andersen Certified Public Accountants. According to this sale, the joint venture company confirmed the investment appreciation of about 900,000 US dollars. The company doubts the rationality of this sale. Because the joint venture company has held the industry for a short time, there is no new discovery in geography, and it is impossible to prove that the value of the industry exceeds the cost at the time of acquisition. In addition, ordinary companies infer from the sales situation of the industry 10% that the remaining 90% also have value-added. 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 information of Guinness and mutual companies.

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 inform the joint company that the transaction of Hawkes Love Company was illegal, and issued an unqualified audit report on the financial statements of the joint company 1969 on February 5. Three. Audit of financial statements of United Company 1969 by Andersen Certified Public Accountants When formulating the annual audit plan of United Company 1969, Phil Ka, a partner of Denver Office, established a set of new auditing standards to guide the audit of subsequent revaluation transactions of United Company. Obviously, the formulation of the audit guide is due to the consideration of the suspicious transactions of Hawkes Love Company in the last year's audit, and it will assume greater responsibility for the annual audit of United Company 1969. According to the court evidence, in the annual audit of United Company 1969, the Denver office should bear the audit responsibility 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 would be inappropriate to disclose only the valuation methods of ordinary companies' investment in natural resources if they could not fairly reflect the whole truth. 1969165438+10, Filka drafted a memorandum on auditing standards, requiring auditors to follow these standards when reviewing the future revaluation transactions of ordinary companies. 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 joint venture 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 the common company earlier), and it was necessary to reassess these 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 led the common company to mistakenly confirm that the value-added of its Arctic industry exceeded 25%, and the total value-added was about $65,438+0.10.90 billion. 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 the Arctic industry had a very significant impact on the market value of the joint company. 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 joint company's investment in the Arctic industry had increased. The district director agrees with this view. Filka 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 investment value of natural resources of the joint venture company, and assume 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 the joint company on June196965438+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 United Company 1969, the Denver office of Andersen Certified Public Accountants identified blakely Walcott's transaction as 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 the firm from Jin's company questioned, which is used to support the credibility of the financial statements of the joint venture company in 1969. In particular, the evidence used in the report to prove that the joint company's investment in the Arctic industry has increased significantly is even more incredible. However, the court found with regret that although it had obtained the latest information about blakely Walcott's transaction, Andersen Certified Public Accountants continued to rely on the audit evidence collected from Guinness Company and Guinness Company related to the annual audit of United Company 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 Macon about the subsidiary agreement. Before signing the audit opinion on the financial statements of United Company 1969, an article published in the Wall Street Journal once again caught the attention of the auditors of the firm, suspecting that there may be undisclosed subsidiary agreements in Macon's transactions. 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 joint company against Andersen Certified Public Accountants and the court judgment: The bankruptcy administrator of the joint company accused Andersen Certified Public Accountants of allowing the gold company to cheat the joint company; The company did not tell the manager of the ordinary company about 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. United Company has repeatedly claimed that if the firm discloses its views on the essence of Arctic industry transactions, 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 the joint company also accused the firm of failing to comply with the obligations stipulated in the power of attorney and failing to inform the management of the joint company of the 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 the firm refuted the allegations of the bankruptcy administrator of ordinary companies. First, if the information obtained from the gold company is told to ordinary companies, it will violate the confidentiality principle of auditors. Second, insist that the board of directors of the common company should bear the main responsibility, and take the sale of part of the property rights of the Arctic industry of the gold company as the basis for evaluating the market value of the common company's industry. 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 the Arctic industry of the joint venture company. Third, the firm claims that it has not found any transactions or activities that can be called "misconduct" during the audit. Of course, it is impossible to report misconduct to the management of ordinary companies. The court concluded that the price that Kim sold to the joint company was too high, and the company should report to the management of the joint company. The court held that the company was fully aware of the fact that Kim cheated the joint company.

It is further pointed out that Andersen Certified Public Accountants did not clarify the different relationships between the parties concerned and the transaction prices between them, which had a great impact on the fair expression of the financial situation of the joint venture company. "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 joint 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 joint company should be mainly responsible for business decisions, 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 did not inform the common company of any misconduct found during the audit. The court ruled that the revaluation of Arctic industry was fraudulent. This judgment mainly considers three aspects: (1) Andersen Certified Public Accountants learned that there was fraud in the blakely Walcott transaction in 1966 before signing the audit opinion on the accounting statements of the joint venture company in 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 a joint 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 accounting statements of United Company 1969 did not reduce the legal responsibility of its firm. When the firm invoked the principle of auditor confidentiality to seek protection, it ignored the fact that the firm used the accounting records of Gold Company in its audit and repeatedly asked Gold Company to provide information about the relationship between Gold Company and United 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. In view of the audit report with reservations, the judge's judgment and the reserved opinions in the audit report signed by Andersen Certified Public Accountants on the accounting statements of United Company 1969, it did not fully show the management of United Company that the firm had doubts about the valuation of natural resources industry, nor could it completely avoid the substantial damage to the economic interests of United Company. 198 1 In the summer, after 8 weeks of trial and 2 weeks of review, Andersen Certified Public Accountants was awarded compensation of US$ 80.79 million to the joint venture company (later reduced by about US$/kloc-0.0 million). This is the highest salary audit case made by an accounting firm in American history.