Question

Assume that Stanford CPAs encountered the following issues during various audit engagements in 2014:

Stanford conducted the audit of Luck, a new client this past year. Last year, Luck was audited by another CPA, who issued an unmodified opinion on its financial statements. Luck is presenting financial statements for 2013 and 2014 in comparative form.

One of Stanford’s clients is RealCo, a real estate holding company. Assume that RealCo experienced a significant decline in the value of its investment properties during the past year because of the downturn in the economy and has appropriately recognized that decline in market value under GAAP. Stanford wished to emphasize the decline in the economy and its impact on RealCo’s financial position and results of operations for 2014 in its audit report.

For the past five years, Stanford has conducted the audits of TechTime, a company that provides technology consulting services, and has always issued unmodified opinions on its financial statements. Based on its 2014 audit, Stanford believes that an unmodified opinion is appropriate; however, Stanford did note that TechTime reported its third consecutive operating loss and has experienced negative cash flows because of the inability of some of its customers to promptly pay for services received.

Stanford has assisted Cardinal Inc. with the preparation of its financial statements but has not audited, compiled, or reviewed those financial statements. Cardinal wished to include these financial statements in a communication that would describe Stanford’s involvement in the preparation of the financial statements. Stanford believes that Cardinal’s communication is adequate and appropriately describes Stanford’s limited role in the preparation of the financial statements.

Trees Inc. presents summary financial information along with its financial statements. The summary financial information has been derived from the complete set of financial statements that Stanford has audited (and issued an unmodified opinion on the complete financial statements). A lender has engaged Stanford to evaluate and report on Trees’ summary financial information. Stanford believes that summary financial information is fairly stated in relation to Trees’ complete financial statements.

Stanford believes that some of the verbiage in Plunkett’s Management Discussion & Analysis section is inconsistent with the firm’s financial statements. Stanford has concluded that Plunkett’s financial statements present its financial position, results of operations, and cash flows in accordance with GAAP and has decided to issue an unmodified opinion on Plunkett’s financial statements.

Oil Patch is a client in the energy industry that is required to present supplementary oil and gas reserve information. Stanford has performed certain procedures regarding this information and concluded that it is presented in accordance with the Financial Accounting Standards Board (FASB) presentation guidelines and does not appear to depart from GAAP. Based on the audit, Stanford plans to issue an unmodified opinion on Oil Patch’s financial statements.

Required:

How would each of these issues affect Stanford’s report on the client financial statements? Do not draft the report that Stanford would issue for each situation. Be sure to answer each situation separately.

Answer 1

Chairman Neugebauer, rating Member Capuano, participants of the Subcommittee, thank you for the opportunity to testify in these days on behalf of the Securities and trade fee.

The fee commends the work of the Inspector common and his employees investigating this topic and drafting the record, Investigations of the SEC's Response to considerations involving Robert Allen Stanfords Alleged Ponzi Scheme, OIG-526 (the Stanford IG record). This vast investigation naturally identified missed possibilities for safeguarding traders, and we deeply remorse that the SEC failed to act extra quickly to restrict the tragic losses suffered by way of Stanfords victims.

The Stanford IG record, which used to be released final year, made foremost ideas selecting areas for development during the SEC and, as we can discuss today, both the Division of Enforcement and the workplace of Compliance Inspections and Examinations (OCIE) have instituted various measures to put into effect all of these suggestions.

Additionally to the Inspector basic's strategies, each of us has, seeing that becoming a member of the commission inside the last two years, engaged in a top to backside assessment of our respective Division and place of work, and applied measures to reform our organizational strategies and beef up our effectiveness. We have streamlined administration; put seasoned investigative attorneys back on the entrance strains; elevated our examiners danger-evaluation procedures; revised our enforcement and examination systems to beef up coordination and know-how-sharing; leveraged the competencies of third parties; instituted new initiatives to determine fraud; improved our training applications; hired staff with new ability units; and revamped the best way that we handle the huge quantity of guidelines, complaints, and referrals that we receive yearly.

Even though our reform efforts are ongoing, the Inspector normal's recent file, OCIE Regional places of work Referrals to Enforcement, record No. 493 (Referral IG record), issued on March 30, 2011, suggests that stronger coordination between Enforcement and OCIE is proving strong in lots of respects, principally within the subject of handling referrals from OCIE to Enforcement. Moreover, reinforced collaboration between OCIE and Enforcement has resulted in a quantity of splendid enforcement moves previously two years.

Regardless of the numerous changes, more work remains. This may increasingly require dedication and creativity. We embrace the mission and commit ourselves to bettering investor protection and the integrity of our fiscal markets.

Popularity of the Stanford Case

In February 2009, the SEC filed an emergency civil motion to halt sales of Stanford Certificates of Deposit (CDs) and seek the return of dollars to harmed buyers. Quickly thereafter, the SEC filed an amended grievance towards Robert Allen Stanford, James M. Davis, Stanford international bank (SIB), and others alleging a big Ponzi scheme within the sale of SIB CDs.

With the aid of the end of 2008, SIB had sold more than $7.2 billion of CDs through touting the bank's security and protection, constant double digit returns on the bank's investment portfolio, and high premiums of return on the CDs that generally passed premiums furnished by using U.S. Commercial banks. The SEC's criticism alleged that Stanford and Davis misappropriated billions of dollars of investor dollars and invested funds in speculative, unprofitable private companies controlled by means of Stanford. So as to conceal their fraudulent conduct, Stanford and Davis allegedly fabricated the efficiency of the financial institution's investment portfolio and lied to buyers about the nature and efficiency of the portfolio. The SEC alleged that, as an alternative than making primary redemptions and interest payments from earnings, Stanford made purported interest and redemption repayments from cash derived from CD income.

Working in close coordination with the SEC, the division of Justice, on June 19, 2009, unsealed indictments against Stanford, Davis and three other former Stanford workers, alleging that they dedicated securities, wire and mail fraud and obstructed the SEC's investigation. On June 30, 2009, the court docket ordered that Stanford be detained in prison pending his criminal trial.

In June 2009, the SEC also sued Leroy King, the former Administrator and Chief government Officer for the Antigua monetary offerings Regulatory fee (AFSRC), alleging that Stanford bribed King to aid him conceal his fraud and thwart the SECs investigation. As alleged in the SEC grievance, even as King bought bribes from Stanford, he rebuffed SEC inquiries into Stanford's conduct by means of stating, amongst different things, that additional investigation of Stanford used to be unwarranted, and that his financial institution was once fully compliant with Antiguan financial institution rules.1 King additionally allegedly authorized Stanford to, in influence, ghost write the response by means of the AFSRC to the SEC, which rejected the SECs demand for expertise. The alleged bribing of King authorised Stanford to preserve his alleged fraud alive for years. Additionally to the SECs expenses, the department of Justice indicted King on bills, together with obstruction of justice, for allegedly accepting tens of enormous quantities of bucks in bribes to facilitate the scheme.

The SEC is vigorously pursuing its case against Stanford and the others charged in this tremendous Ponzi scheme. Furthermore, the employees investigation into feasible misconduct with the aid of others (including former staff and 1/3 parties) is ongoing.

Status of healing for Stanford buyers

The SEC's center of attention in the Stanford litigation is to keep wrongdoers responsible whilst working with the Receiver to hint and get better the money that buyers misplaced on this egregious fraud. We are continuing on several fronts.

First, after filing its civil motion in February 2009, the SEC filed a motion asking for that the district court appoint a Receiver over the defendants assets to restrict waste and dissipation of these belongings to the detriment of buyers. 2nd, to complement the Receiver efforts, the SEC, in coordination with the DOJ, moved to freeze SIB belongings held in worldwide financial associations. Freezing property in international jurisdictions poses difficult litigation challenges, however this step was relevant to make sure the safety of investor funds. 1/3, the SEC is working with the Receiver, DOJ, and securities regulators and legislation enforcement organizations in the United Kingdom, Switzerland, Canada, Mexico, and in a number of international locations in the course of central and South the united states, to establish, cozy, and repatriate for the advantage of buyers over $300 million in money and securities held in non-U.S. Financial institution debts.

In a status document filed February 11, 2011, the Receiver recognized several categories of foremost property for possible distribution to harmed investors:

$94.7 million in cash available;
$30.Four million in personal equity investments already recovered and liquidated;
$1 million in coins and bullion stock;
$6 million in real estate sale proceeds, with a further $eleven.7 million expected from earnings of different recognized homes; and
$594.9 million in pending fraudulent transfer and unjust enrichment claims.2
in conjunction with the SEC, the Receiver is eager about picking out and liquidating the largest feasible pool of accessible property for distribution to harmed traders.

The SEC has been and can continue to intently monitor the Receivers expenditures, and we've got strongly advised the Receiver to stringently apply a cost-improvement evaluation and to pursue simplest those legal claims that might generate maximum proceeds for investors whilst minimizing the Receivers authorized prices and bills. We also have recommended the Receiver that we're carefully scrutinizing all expenditures inquiring for payment for expenses and expenditures. In fact, on at least three occasions, the SEC has formally challenged the Receivers costs. We will be able to proceed to do so the place proper.

Fame of SIPC determination in Stanford

The fee oversees the events of the Securities Investor protection company (SIPC), which performs a crucial role in protecting customer property when a broker-supplier enters liquidation under the Securities Investor defense Act (SIPA). In the Stanford topic, SIPC has indicated that, in its view and centered on the tips presented, there's no groundwork for SIPC to provoke a proceeding below SIPA.3 The fee is taking the concerns of the Stanford Victims Coalition (SVC) members, and all other Stanford victims, very severely, and the staff is investigating closely their fame below SIPA. Commission employees has devoted tremendous effort and time to analyzing the issues surrounding a abilities SIPA liquidation of SGC. As part of this assessment, the employees has met with representatives of the SVC and other Stanford victims on a couple of events to speak about this matter. The employees additionally has been reviewing records significant to the investigation, together with account information bought from the SVC. The staff is finalizing its investigation and overview of the vital tips when it comes to the Stanford case, and we anticipate that the fee will make a resolution related to these disorders in the close future.

Enforcement and OCIE Responses to Inspector general suggestions

On April 16, 2010, the SEC released the record via the Inspector normal regarding the investigation of the Stanford topic (Stanford IG file). The document recognized the necessity for reforms in the Division of Enforcement and within the place of job of Compliance Inspections and Examinations. As described in additional detail beneath, now we have taken moves to respond to every of these strategies, and thus, all seven strategies from the document have now been closed with the workplace of Inspector commons concurrence.

Division of Enforcement

Stanford IG document

The Division of Enforcement has taken motion on all seven of the formal recommendations recognized within the Stanford IG report. On July 20, 2010, Enforcement submitted a closing memorandum to the Inspector general containing expertise that we believed utterly addressed all seven suggestions. Recommendations 2, 4, 6 and seven were closed by the Inspector basic on October 8, 2010 and, following further moves through Enforcement, ideas 1, three and 5 have been closed through the Inspector basic on March 9, 2011.

First recommendation. The Inspector basic advocated that we assessment the skills harm to investors when determining whether or not to carry an enforcement action that also could contain litigation risks. The Division's Enforcement manual,4 developed in October 2008, presents that employees should recall a couple of factors when identifying whether to open an investigation, together with: (i) the abilities losses worried or harm to investors and (ii) the egregiousness of the knowledge violation. Moreover, the Enforcement handbook also states that first among the explanations the staff will have to recollect before closing an investigation is the seriousness of the behavior and capabilities violations. As these Enforcement guide provisions point out, previous to the Stanford IG file, the Division inspired staff to cautiously check motives similar to potential harm to traders and seriousness of competencies violations when determining whether or not to open or shut investigations. In accordance with the record, we now have instituted mandatory Enforcement handbook training for all Division employees to make certain compliance.

Additionally to its Enforcement handbook provisions and associated coaching, the Division more commonly records actions in federal court docket seeking emergency temporary restraining orders and asset freezes to preclude approaching investor harm and preserve property for the benefit of buyers movements that quite often gift litigation danger given the exigent circumstances of the very early phases of an investigation. In fiscal yr 2010, Enforcement acquired 37 emergency temporary restraining orders to halt ongoing misconduct and hinder coming near near investor harm and 57 asset freezes to keep cash for the improvement of traders.

Fourth recommendation. The Inspector basic recommended that we consider promulgating and/or clarifying procedures regarding coordination between Enforcement and OCIE on investigations, especially those investigations initiated by a referral to Enforcement by way of OCIE. As a result of various Enforcement/OCIE initiatives, there now exists a vastly multiplied degree of collaboration between Enforcement and OCIE staff. Enforcement and OCIE, at the side of the opposite divisions, preserve general month-to-month conferences to, among different matters, discuss disorders raised in ongoing examinations. Furthermore, the numerous hazard-headquartered investigative initiatives undertaken as a part of the total restructuring of the Enforcement Division require early and frequent contact between Enforcement and OCIE to: (i) determine entities with risk profiles indicative of the necessity for a chance-centered examination; (ii) speak about the findings of ongoing examinations; (iii) talk about the scope and nature of referrals to Enforcement for investigation; and (iv) advance analytic instruments as wanted. For that reason of this collaboration, the following inquiries, among others, have been launched:

Suspicious performance. This inquiry specializes in suspicious efficiency returns posted by using both registered and unregistered hedge fund advisers. Analytics have been developed to check performance data of hedge fund advisers and establish candidates for examination or investigation.
Bond cash. This inquiry specializes in disclosure and valuation problems in mutual fund bond portfolios. Established on practices recognized in an examination of a giant bond fund complex, threat analytics had been created that establish feasible subjects for investigation and/or examination.
Mutual Fund expenses. It is a set of inquiries into capabilities excessive cost arrangements via mutual dollars, their advisers, and boards of administrators. This initiative has resulted in examinations and investigations of advisers, money and their boards curious about viable violation of the investment Advisers Act and funding corporation Act.
Quandary Advisers. It is a chance-established process to detecting obstacle advisers by means of conducting due diligence checks on designated varieties of advisers. As part of an ongoing prophylactic program to establish potentially problematic advisers before they motive investor harm, Enforcement and OCIE are evaluating knowledge about countless numbers of funding advisers which are believed to be high-chance advisers.
Investment Adviser Compliance. This is a coordinated effort to establish and carry instances in opposition to registered investment advisers who have lacked robust compliance applications and tactics, in violation of the Advisers Act. Potent compliance packages and personnel are instrumental to protecting the investing public from funding adviser fraud.
Finally, as part of the Chairmans initiative to beef up the dealing with of tips, complaints and referrals (TCRs), Enforcement has centered the office of Market Intelligence (OMI) and staffed it with market surveillance specialists, accountants, attorneys and different aid personnel, and further hiring is anticipated. OMIs mission is to make sure that we accumulate all TCRs in a single location, combine that information with different public and private know-how on the persons or entities identified within the TCRs, and then dedicate investigative assets to the TCRs presenting the finest hazard of investor damage. OCIEs referrals to Enforcement are tracked through this new TCR procedure to make certain right Enforcement staff project. The new TCR system allows employees throughout the fee to study, analyze, archive and route TCR understanding from a centralized database and processing platform. The method is designed to give a boost to the commissionâs capability to acquire crucial information from the public at the same time providing the employees with workflow tools to higher correlate, prioritize, assign and monitor the development of TCRs from consumption through decision.