AMERICAN REMODELLING

(AMRE, Inc.)

Presented By :Group- 4
Md Rashed Mahfuz
Jesmin Sultana
Md. Hamidullah
Md. Zihan Akon
Fariha Ferdows Nitu
 Overview

AMRE, short for American Remodeling, began operations in 1980 in

Irving, Texas, the Dallas Cowboy pre center. Within a decade, a leading
company in the home siding industry, dominated by small businesses
marketing their services in a metropolitan area. In 1987,
 In 1980
01 Began operation >>> Fast
growing firm

In 1987
02
Went public

Background Principal operating expenses:

03 Advertising cost > deffered
accounting method

04 Audit Firm : Price Waterhouse

 Individuals involved in the AMRE case

 Robert Levin: Chief Operating Officer

 Dennie Brown: Chief Accounting Officer
 Walter Richardson: Vice President of Data Processing
 Steven Bedowitz: Chief Executive Officer
 Mac Martirossian: Chief Financial Officer
 Edward Smith: Audit Engagement Partner
 Joel Reed: Senior Audit Manager
 Overview of Price waterhouse

 British multinational professional services brand of firms,

operating as partnerships under the PwC brand.
 The second-largest professional services network in the worldand
is considered one of the Big Four accounting firms,
 Founded in 1849( Price waterhouse); 1854 ( Coopers & Lybrand;
1998( price waterhouse Copers )
 Headquarters London, England
 Key Facts of the case

 Rapidly growing company in a very competitive home siding

industry, and industry historically dominated by small businesses.
 Main operating expenses were advertising costs,
 To determine cost per lead AMRE used the following formula:
 Cost per lead =
 
 Deferred Advertising Cost= (Cost per lead* unset lead)
 
 Advertising cost = Total advertising costs – Deferred advertising costs
 Key Facts of the case (Continued..)

 After going public in 1987 and listed its common stock on the New York Stock
Exchange AMRE's financial results fell short of earlier projections)
 AMRE’s top executives revealed their fraudulent scheme to the company’s new chief
accounting officer, Mac Martirossian before end of 1989
 During Price Waterhouse’s 1989 AMRE audit, Martirossian met secretly with the
auditors and suggested to them that the large fourth-quarter adjustments did not pass
the “smell test’’
 Martirossian never revealed the true nature or purpose of those ajustments. Price
Waterhouse ultimately accepted the large fourth-quarter adjustments before issuing
an unqualified opinion on AMRE's 1989 financial statements
 The SEC ruled that the audit engagement partner and the senior audit manager who
oversaw the annual AMRE audits had failed to comply with GAAS during the 1988
and 1989 engagements
 Fraud perpetrated by executives

 Levin ordered the company's chief accountant, Dennie D. Brown, to overstate

the amount of undetermined profits in AMRE's lead
 Brown further instructed Walter W. Richardson, the company's vice president
for data processing to include fictitious undetermined benefits in the lead bank
 This accounting scheme allowed AMRE to overstate its pretax income for the
quarter by approximately $ 1 million or nearly 50 percent.
 In the second quarter of fiscal 1988, AMRE executives once again inflated the
company's undetermined profits to cover the company's advertising costs for
the period
 Levin ordered his subordinates to overstate AMRE's closing inventory for the
third and fourth quarters of fiscal 1988.
 Fraud perpetrated by Auditors

 Failed to properly test AMRE's deferred advertising expenses

 Staff auditors failed to adequately test the number of unset leads
reported by AMRE at the end of fiscal 1988.
 Simply compared the number of unset leads on two client-
prepared schedules
 Agreed with the executives to bypass EDP test to hide their
accounting fraud
 Allow AMRE to monitor the physical counts at three of the
inventory sites that they had selected for observation
 Penalty to Executives

 Brown to pay approximately $16,000 to the federal government

 Levin paid nearly $1.8 million to the federal government, including
a $500,000 fine for violating the provisions of the Insider Trading
Sanctions Act
 Two former AMRE executives to contribute approximately $8.8
million to a settlement pool.
 AMRE, Inc. contributed another $5.9 million to that pool.
 The SEC criticized Martirossian for not insisting that proper
measures be taken to correct AMRE's accounting records and for
not disclosing the fraud to Price Waterhouse.
 Penalty to Auditors

 SEC prohibited Smith and Reed from being assigned to audit

SEC clients for a period of nine months.
 SWOT Analysis of AMRE Inc.

Strengths Weakness Opportunity Threat

1. AMRE 1. There is no 1. AMRE became 1. lack of investor
dominates the clear a publicly confidence in
world of separation of traded financial
housing and duties company in reports.
interior 2. The absence 1987 2. Investors do not
decoration of adequate 2. The stock will want to invest in
industry in management go up stocks
metropolitan control and 3. Resulting in
cities in the integrity in bankruptcy
United States carrying out
2. Has a broad its duties.
marketing
technique
through
advertising
 Findings

 AMRE's management committed a massive accounting fraud that

involved manipulating the company's financial records
 AMRE, s management used fictitious assets and percentage of
completion methods.
 Price waterhouse failed to detect and report the fraud, despite
discovering some accounting irregularities in 1989.
 Price waterhouse also failed to test the number of unset leads
reported by EMRE at the end of fiscal year 1988.
 AMRE did not use a perpetual inventory system
 Alternatives Courses of Action

 To stress the importance of auditors maintaining a high degree of skepticism

when dealing with client.
 To emphasize the hazards of allowing a client to influence key audit planning
decisions.
 To illustrate the potential for abuse of the percentage-of-completion accounting
method
 To illustrate the critical importance of auditors remaining strictly independent of
their clients
 To demonstrate the need for auditors to test a client's EDP controls and to
consider the resulting implications
 To demonstrate the SEC’s willingness to impose sanctions on private
accountants for failing to satisfy their ethical and professional responsibilities
 Conclusion

 One of the most important aspects of this case, in our view, is

Martirossian’s role in the cover up of the fraud. This case clearly
demonstrates that even an individual with integrity may not
respond appropriately to an ethical dilemma. We believe that this
case is important for us in case we may face these types of
situations during our careers and, consequently, should have a
strategy for coping with such scenarios.
 This case is also well suited for covering of audit evidence
 Solutions to Case Questions

1. Define the terms ethics and professional ethics. Using the following scale, evaluate the conduct of each
individual involved in this case.
-100 ……………0…………….100
Highly Highly
Unethical Ethical
Answer: Generally, ethics refer to moral principles and values. Random House Webster’s College Dictionary
notes that ethics are “the rules of conduct recognized in respect to a particular class of human actions or
governing a particular group, culture, etc.”
Following is a list of the individuals involved in the AMRE case:
 Robert Levin, Chief Operating Officer
 Dennie Brown, Chief Accounting Officer
 Walter Richardson, Vice President of Data Processing
 Steven Bedowitz, Chief Executive Officer
 Mac Martirossian, Chief Financial Officer
 Edward Smith, audit engagement partner
 Joel Reed, senior audit manager
 Solutions to Case Questions

2. Do you believe that the individuals who behaved unethically in this case were
appropriately punished? Defend your answer.
Answer: The executives involved in the AMRE fraud agreed in a consent order to refrain from
violating federal securities laws in the future. In addition, Robert Levin and Dennie Brown
forfeited funds they realized from sales of AMRE stock during the fraud. Levin also paid $1.8
million to the federal government, including a $500,000 fine for insider trading. Finally, Levin
and Steven Bedowitz contributed approximately $9 million to a settlement pool to resolve a
large class-action lawsuit. Most of us conclude that the AMRE executives who participated in
the fraud were appropriately punished.
 Solutions to Case Questions

3. Identify the alternative courses of action available to Martirossian when he became aware of
the accounting fraud at AMRE. Assume the role of Martirossian. Which of these alternatives
would you have chosen? Why?
Answer: Answer: Among the alternative courses of action available to Martirossian were the
following:
 Aid in the cover up of the fraud.
 Demand that the executives involved disclose the fraud to the auditors. If they refused to
comply, report the fraud to the SEC.
 Report the fraud to the auditors and to the Board of Directors immediately.
 Secretly report the fraud to the auditors.
 Resign his position with AMRE, Inc.
 Solutions to Case Questions

4.Was AMRE's practice of deferring a portion of its advertising costs in an asset account
appropriate? Defend your answer.
Answer: Answer: Among the alternative courses of action available to Martirossian were the
following:The relevant accounting concept in this context was the matching principle. The
matching principle requires that expenses be matched with the revenues they produce.

Nevertheless, AMRE’s policy of deferring all of the advertising costs related to unset leads was
very aggressive and probably resulted in the booking of assets that would provide no future
benefits for the company.
 Solutions to Case Questions

5. What key red flags, or audit risk factors, were present during the 1988 and 1989
AMRE audits? Did Price Waterhouse appropriately consider these factors in planning those audits? Why
or why not?
Answer: Answer: Listed next are key audit risk factors that were present during the 1988 and 1989
AMRE audits.

a. AMRE's management had a strong incentive and desire to maintain the company's stock price at a
high level.
b. AMRE’s unset leads increased dramatically during 1988.
c. The company’s inventory also increased significantly during 1988 and increased much more
rapidly than the company’s sales.
d. The efforts of AMRE’s executives to influence important audit planning decisions should have
been of concern to the auditors.
e. The percentage-of-completion accounting method was an unusual method to apply to AMRE’s
installation jobs since those jobs typically required only four to ten days to complete.
f. AMRE had several large and unusual fourth-quarter adjusting entries in 1989.
g. Martirossian’s secret meeting with the AMRE auditors should have caused them to question the
integrity of the client’s financial statements.
 Solutions to Case Questions

6. Was Price Waterhouse justified during the 1988 audit in agreeing to allow client personnel to
observe the physical counts at certain inventory sites? To what extent should an audit client be
allowed to influence key audit planning decisions?
Answer: Answer: Whether Price Waterhouse was justified during the 1988 audit in agreeing to
allow client personnel to observe the physical counts at certain inventory sites is a matter of
professional judgment. Apparently, members of the audit team did not believe that the client’s
request posed a major problem--that is, did not result in a material scope limitation, otherwise
they would not have agreed to it.

Client management should not be allowed to influence key audit decisions such as sample size
determinations, assignments of auditors to given areas of the audit, and the types of audit tests
applied to specific accounts. Generally, any time a client request would prevent an auditor from
satisfying the requirements of the third standard of fieldwork--obtaining sufficient competent
evidential matter to support his or her audit opinion, that request should be denied.
 Solutions to Case Questions

7.SAS No. 31 ,"Evidential Matter:' identifies five management assertions that underlie a set of
financial statements. Which of these assertions should have been of most concern to Price
Waterhouse regarding the large period-ending adjustments AMRE recorded during the fourth
quarter of fiscal 1989?
Answer: the relevant U.S. auditing standards presently for audits of public companies are
those issued/endorsed by the Public Company Accounting Oversight Board (PCAOB).
Although SAS No.
31 has been superseded by a new standard issued by the Auditing Standards Board, the
PCAOB still endorses the regime of management assertions included in that standard. In
particular, the SAS No.
31 list of management assertions is now embedded in Auditing Standard No. 15 issued by the
PCAOB.
In most situations, the key management assertion for an expense item is the completeness
assertion. That is, auditors are generally concerned that a client may attempt to understate
expenses. However, in this case the fourth-quarter write-offs in 1989 were initiated by AMRE
management.
 Solutions to Case Questions

8. What responsibility do auditors have for quarterly financial information reported

in the footnotes to a client's audited financial statements?
Answer: Listed next are the key responsibilities an auditor assumes for quarterly financial
information included in the footnotes to a client's audited financial statements. Refer to AU
Section 722 for a more detailed discussion of these responsibilities.

a. The auditor should apply “review” procedures to the interim financial information. (Such
procedures consist principally of inquiries of client personnel and analytical procedures.)
b. The auditor should ensure that the quarterly data are presented as supplementary
information and that each page of the data is clearly marked as unaudited.
c. If the results of the review procedures are satisfactory, the auditor does not need to
modify his or her report on the audited financial statements to make reference to the review of
the interim financial information. However, if the interim financial information does not appear
to be in conformity with generally accepted accounting principles, including adequate
disclosure, the auditor’s report should generally be expanded to address this issue.
THANK YOU