Auditing Leslie Fay Case Essay

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Leslie Fay Company Case

Leslie Fay discovered in 1992 that the company's corporate controller with some other employees had committed a serious auditing fraud which showed inflated profits. When these irregularities were found, the company had already been knee-deep in debt as there were losses of around $81 million dollars. This led to the company filing bankruptcy to protect itself against creditors. This was indeed a serious issue and one may wonder if SOX, had it been designed then, would have been able to discover the irregularities much sooner.

Theoretically speaking, it appears that the answer would be in the affirmative. A company which is closely following SOX's mandatory auditing practices of having an internal control system and independent auditors checking the presence of those controls would be in a much better position than Leslie Fay because irregularities could be unearthed sooner. With internal controls such as random checking of transaction and running them through controls is an effective way of controlling irregularities especially the ones taking place on large scale like in the Leslie Fay case. It was found that none of the entries on the cost side were accurate and all had been doctored to show profits.

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Similarly with third party auditing, it would have been much easier to capture irregularities.

Having said that, we must not forget that this is all in theory and how SOX fares in practice can only be seen after implementation of the law. The reason we say this is because every company has a different culture and a different way of conducting business which in some cases may actually affect serious implementation of SOX. Secondly unethical behavior can occur at all levels and it's possible to assume that some people would still betray the many layers of auditing protection provided by SOX to doctor financial statements. Hence it is highly debatable if accounting irregularities could be found….....

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