6 October 2013
Audit
Case 4.3
1a. The auditor’s responsibility should have been to show the misstatements that CUC had since 1995. Deloitte and Touche, LLP should have reviewed past audits with Ernst and Young, CUC’s prior auditors.
b. One category of fraud that affected the financial reporting was the independence with CUC. They hire a few employees who worked for Ernst and Young in the past. This is an independence problem. The other fraud category would be the false coding of services sold to customers. This allowed CUC to immediately recognize revenues and profits instead of deferring them over the benefit period. Another fraud would be the delayed recognition of membership cancellations and bank rejection charges made to members. They would delay these because it would inflate revenues and profits during the current reporting period.
c. The auditors should check with the independence rule. The employees who use to work at Ernst and Young could have been friends with the auditors or management and they overlooked some of the problems. They should check all of the current and prior memberships for the CUC and check how many cancellations they had before the reporting period.
d. CUC managers wanted to meet the expectations of the Wall Street analysts. CUC’s stock prices were artificially inflated and so were the pretax operating earnings in 1995, 1996 and 1997 which were $31 million, $87 million and 176 million.
3a. CUC’s management allegedly inflated earning by recording fictitious revenues and reducing expenses to meet Wall Street analysts’ earnings expectations. Also the employees that worked for Ernst and Young were now employed by CUC; this could be an independence factor. In the court testimony by Cosmo Corigliano, CFO of CUC he stated that the fraud was ingrained in everyone’s head by their superiors over a long period of time. So the