Leslie Fay Case Summary

Paul Polishan, CFO and Vice President-Finance, ran the office of Leslie Fay like a dictator. Paul had control over the accounting and finance departments. He was responsible for finalizing the financial statements and ordering his subordinates to record those figures that he deemed fit or thought would window-dress the financial statements. Every transaction in the company had to pass through Paul. This implies that he had control over all the three factors of internal control, i.e. custody, authorization and recording. His dominance in the key departments of Leslie Fay, shows an internal control weakness, which was caused due to lack of segregation of duties. He used intimidation to control his subordinates regularly. Dominating other employees …show more content…
This is because a person who dominates the accounting function, can easily perpetrate and conceal the wrongdoing. This leads to increased inherent risk and control risk, and the same should be carefully assessed by the auditors. A high control and inherent risk means that the auditors will have to do more substantive testing in order to reduce their detection risk. Detection risk must be reduced to lower the overall audit risk to such a level that the auditors consider acceptable, in order to proceed with the audit. Also, Leslie Fay’s manual system of accounting, keeping the earnings and revenue high despite of the recession phase and distribution of exorbitant bonuses on the basis of sales, should have caught the auditor’s attention to believe it to be a motive to commit fraud. The auditors should have taken such circumstances into consideration, while planning the audit.
Firstly, auditors should obtain adequate understanding of Leslie Fay’s internal controls. This could have been done using internal control questionnaires, narratives or flowchart. Using a narrative best suits this situation because it would help the auditors identify the separation of duties control. Using the narrative as base document, the auditors can conduct a walk-through of the internal controls and then do vouching and tracing to check for completeness and existence assertion.