Research Memo



Memorandumof the File






TheAudit Report release date was November 24, 2014. IGU has been theclient of E &ampY since 2002. IGI provided statements about E&ampYthat could not be substantiated based on the financial statements ofSeptember 2014. At the same time, Hurry a first-time auditor at theplace was the officer handling the auditing process. Ernest and Youngis IGI biggest client, meaning that the report could have high stakeson its financial statements. Hurry and other employees of IGI such asBen Kruel and Vera Wimpie have worked together before in the sameorganization. Insurance Giant Inc. (IGI) is located in Boston, MA.E&ampY has been IGI’s auditor since 2002. The IGI report about E&ampY was included in Form-10-K, which is a statutory requirementthat it is filed by with the Securities Exchange Commission (SEC).The filing will take place on November 28, 2014.

PCAOBnotified E &amp Y about its impeding inspections of E &amp Y aspart of its yearly auditing programs to check compliance issues forall registered auditing firms and associated person. E &amp Y hasinformation about the unscrupulous report IGI wrote about it, whichwas submitted to SEC. The caveat is whether E &amp Y is in thecorrect legal position to inform PCAOB about the issue because it hasfar-reaching implications on the reputation and its share value.Furthermore, E &ampY has an internal policy that files shall not bemodified or altered in the event of inspection notifications fromregulators. PCAOB is likely to find out about the unqualified reportit wrote about E &amp Y and if there are justifications for such astep, it is likely to be culpable To SEC sanctions.


Thefirst issue is that Kruel is considers her partnership prospects injeopardy since this is her first assignment as an auditor. Hence,upon realizing that there are some files missing yet the auditprocess is up next, she thinks information Wimpie and Kruel will casther in bad light as incompetent and hurt her prospects. Nonetheless,information them in advance is the better option than let the PCAOBfind out about the missing files. Secondly, a very important file,the review procedures memorandum, was missing. The decision Krueltakes is even more dangerous and increases the company’sculpability during the audit process. Creating and printing outanother copy of the review procedures memorandum in a hurry is likelyto breach E &amp Y’s policy. Including the document in the fileswould amount to fraud and if PCAOB finds out that the document isforged, there will be legal problems on the way of all threeaccounting officers. Thirdly, the tie-out of financial statements wascarried as a pre-final set rather the final set. Again Kruel makes adangerous move, he instructs Hurry to replace the tie-out withanother forged documents that ties-out financial statements as afinal paper and included in the files and backdated to November 30,2004. Fourthly, another important document, the Forward ForeignCurrency Contracts Calculation, was missing in the wake of the auditprocess. Again, Kruel instructed Hurry to forge another one andinclude it in the working papers. Finally, three checklists weremissing and Wimpie instructs Hurry to hurriedly assemble otherchecklists and include them as a single document in the workingpapers.

Discussion,research Citation, and Analysis

Theevents about at E &amp Y prior to the inspection by PCAOB are likelyto make it culpable to the SEC because there several provision of theSarbanes-Oxley Act of 2002, that Hurry, Kruel, and Wimpie may havebreached as they try to cover the improprieties in E &amp Y’saccounting traditions (Coates, 2007 Kamar, Karaca-Mandic, &ampTalley, 2009). Moreover, the fact that officials cannot honor theinternal policy of not altering documents submitted as working papersprior to inspection means that there are also other underlyingproblems pertaining to integrity.

Thereare several provisions of The Sarbanes-Oxley Act that were breachedby the accounting team comprising of Hurry, Wimpie, and Kruel.

  1. Article 105 has unspecified sanctions for any violation of SEC requirements on the preparing financial information (Sarbanes 2002).

  2. Article 103 requires that the files be submitted to second partner reviews and yet there is no indication that E &amp Y did so.

  3. Article 802 provides that there will be criminal penalties for any firm that deliberately destroys audit records. From all indications provided the report by IGI about E &amp Y will not get in the hands of PCAOB. There is a likelihood of charges for company‘s failure to maintain all audit review work papers (Kamar et al., 2009).


Theculpability of E &amp Y is inevitable. The company should haverequested for more time to prepare its working papers beforeinspection because Sarbanes’s-Oxley provides for such requeststhough on a limited scale. However, there are also all indicationsthat the inspections will un-earth serious violations committed bythe E &amp Y audit team as hinted by IGI.


Coates,J. C. (2007). The goals and promise of the Sarbanes-Oxley Act. TheJournal of Economic Perspectives, 91-116.

Kamar,E., Karaca-Mandic, P., &amp Talley, E. (2009). Going-privatedecisions and the Sarbanes-Oxley Act of 2002: A cross-countryanalysis. Journal of Law, Economics, and Organization, 25(1),107-133.

Sarbanes,P. (2002, July). Sarbanes-oxley act of 2002. In The Public CompanyAccounting Reform and Investor Protection Act. Washington DC: USCongress.