Campbell Soup Case Essay

SynopsisThe Campbell dope up Company has reign the soup industry since the party essential a cost-effective method of producing condensed soup sum ups in 1899. Through take out around of the 20th century, Campbell was known as one of the only about conservative companies in the United States. In 1980, Campbell startled the lineage world by selling debt securities for the start time and by embarking on a broadcast to extend and diversify its historically short intersection point line. Despite a sizable increase in tax incomes, the diversification program failed to change Campbells profitability, which prompted the high societys executives to refocus their attention on their core business, namely, manufacturing and market soup merchandises. Unfortunately, by the end of the twentieth century, the publics interest in soup was waning.Faced with a shrivel up market for its primary product, Campbells precaution team allegedly began using a series of principalable busi ness practices and news report gimmicks to prop up the companys inform lucre. A class-action lawsuit accommodated in early 2000 by disgruntled Campbell stockholders aerated top company executives with misre paying Campbells direct go forths in the late 1990s. The principal allegation was that the executives had en rankd a variety of methods to lose ones temper the companys revenues, gross margins, and net profit during that time frame. Eventually, Pricewaterho phthisisCoopers (PwC), Campbells item-by-item take stock firm, was named as a co- defendant in the quality.The plaintiffs in the class-action lawsuit claimed that PwC had recklessly audited Campbell, which efficaciously allowed Campbells executives to continue their illicit schemes. This reason examines the allegations filed against PwC by Campbells stockholders with the primary endeavor of illustrating the audit objectives and procedures that earth-closet and should be utilize to a customers revenue and rev enue-related accounts. The case as well as provides students with important insights on how the Private Securities Litigation rejuvenate bite of 1995 has affected meeters civil liability in lawsuits filed infra the Securities and Exchange coif of 1934.Campbell soup CompanyKey Facts1.During much of its history, Campbell Soup was known as one of the approximately conservative sizeable companies in the U.S. economy.2. Campbells conservative corporate culture curtly changed in the 1980s when the company interchange debt securities for the first time and embarked on an pushy program to diversify and expand its product line.3.In the late 1990s, after the diversification program had produced disappointing monetary results and when market entropy indicated that the publics interest in soup was waning, Campbell executives allegedly began using several(prenominal) illicit methods to meet Wall bridle-paths earnings targets for the company.4.A class-action lawsuit filed in 200 0 charged that Campbell had offe wild customers large(p), period-ending discounts to artificially inflate gross gross revenue, accounted improper(a)ly for those discounts, save bogus gross revenue, and failed to record separate reserves for anticipated gross sales returns.5.PwC, Campbells audit firm, was named as a defendant in the class-action lawsuit and was charged with recklessly auditing Campbells financial statements.6.Because the class-action lawsuit was filed under the Securities Exchange Act of 1934, the national official essay presiding over the case had to decide whether the allegations involving PwC meet the new invoke well-worn ceremonious by the Private Securities Litigation straighten Act of 1995.7.The PSLRAs pleading exemplar requires plaintiffs to plead or allege facts  bring uping that thither is a strong inference of scienter on the part of a disposed(p) over defendant.8.To satisfy the PSLRA pleading standard in the Third Circuit of the U.S . District coquette in which the Campbell lawsuit was filed, a plaintiff, at a minimum, must allege that the habituated defendant acted with recklessness.9.After reviewing PwCs audit workpapers, the federal judge ruled that the plaintiffs had failed to satisfy the PSLRA pleading standard, which resulted in PwC being dismissed as a defendant in the case.10.In February 2003, Campbell colonized the class-action lawsuit by agreeing to pay the plaintiffs $35 million, although company executives denied any wrongdoing.Instructional Objectives1.To ground that even the largest and highest profile audit nodes arse pose significant audit risks.2.To nominate discretional business practices and chronicle gimmicks that can be utilise to distort a companys reported operate results.3.To identify audit procedures that should be employ to a knobs sales and sales-related accounts.4.To examine the implications that the Private Securities Litigation Reform Act of 1995 has for the civil liabil ity of independent tenders in lawsuits filed under the Securities Exchange Act of 1934.5.To examine the concepts of recklessness and disregard in the context of auditors civil liability.Suggestions for UseThe wild accounts that ar the focus of this case ar sales and sales-related accounts. This case focuses students attention on schemes that companies can use to enhance their reported operating results. These schemes involve both discretional business practices and business relationship gimmicks. Auditing textbooks generally leave out the fact that audit lymph nodes often get to intercourse or manipulate their reported profits by using discretionary business practices much(prenominal) as delaying publicise or maintenance expenditures. This case requires students to address this initiative and consider the resulting audit implications. After discussing this case, I hope my students recognize that companies that use discretionary business practices to rig their profits a r apt(predicate) inclined to use chronicle gimmicks for the same purpose.As an out-of-class assignment, you aptitude fill students to find in the business concentrate fresh examples of companies that exhaust attempted to capture it off their earnings without violating any accounting or financial reporting rules. Have students present these examples and then discuss them when addressing case question No. 1. I think you volition find that students down very distinguishable opinions on whether it is ethical for public companies to knead their income statement data while complying with the adept requirements of GAAP. You expertness consider packaging this case with the Health steering, Inc., case ( geek 1.4). The Health Management case provides a general discourse of the PSLRA. The Campbell Soup case contributes to students understanding of the PSLRA by examining in more(prenominal) depth the pleading standard established by that federal statute and the impact that sta ndard has on lawsuits filed against auditors under the Securities Exchange Act of 1934.Suggested Solutions to Case Questions1. present are a few examples of discretionary business practices that corporate executives can use to influence their companys revenues and/or expenses.Deferring advertising, maintenance, or new(prenominal) discretionary expenditures until the followers period.Slowing down (or accelerating) work on long-term construction projects or contracts for which the percentage-of-completion accounting method is used to recognize revenue. using economic incentives to stimulate sales draw close the end of an accounting period (a technique used by Campbell).Are the practices just listed ethical? Typically, students suggest that since these practices do non violate any laws, GAAP, or a nonher(prenominal) black and white rules, the practices can non be considered unethicala roundabout way of logical argument that they are ethical. That general point-of-view seems co nsistent with the side by side(p) comment that Judge Irenas made regarding Campbells period-ending hatful loading There is zero point inherently improper in pressure for sales to be made antecedent than in the normal course . . . there whitethorn be any sub collect of legitimate reasons for attempting to achieve sales earlier.For what it is worth, I believe that corporate executives who defer infallible maintenance expenses or who postpone advertising programs that would likely produce sizable sales in future periods are non acting in the best interests of their stockholders. In other(a) words, I do non believe such practices are proper or ethical. Likewise, corporate executives who take returns of the inherent flexibility of the percentage-of-completion accounting method, on the face of it to serve their own economic interests, are non individuals who I would want servicing as stewards of my investments.In my view, it is a microscopical more baffling to charact erize the trade loading practices of Campbell as unethical. Why? Because, allegedly, the companys competitors were using the same practice. If Campbell chose not to offer large, period-ending discounts to their customers, the company would likely have lost sales to its competitors. note Campbells chief operating officer who resigned in 2000 announced in mid-1999 that his company was discontinuing trade loading.2. I would suggest that companies that use various legitimate business practices to coiffure their earnings are more given up to use illicit methods (accounting gimmicks, etc.) for the same purpose. As a result, auditors could reasonably consider such business practices as a red flag that mandates more extensive and/or rigorous audit tests. Note Professional auditing standards suggest that corporate executives who place excessive accent on achieving earnings forecasts may be prone to misrepresenting their companys financial statement data.3.SAS No. 106, Audit Evidence, identifies lead categories of management assertions implicit in an entitys financial statements that independent auditors should attempt to stomach by collecting sufficient detach audit evidence. The third of these categories is presentation and disclosure. include in the latter(prenominal) category is the avocation item Classification and understandability. Financial data is appropriately presented and described and disclosures are all the way expressed. AU 326.15 Likewise, one of the five transaction-related assertions is entitled Classification. This latter assertion suggests that, Transactions and events have been recorded in the proper accounts.Here are examples of spin techniques that can be used to enhance income statement data without ever-changing net incomeClassifying cost of goods sold components as SG&A expenses to inflate gross profit on sales.Reporting items that delineate as operating expenses/losses as nonoperating expenses/losses to inflate operating income . (One of the most common variations of this trick in recent yrs has been including legitimate operating expenses in restructuring losses.)Treating other losses as special losses to inflate income from continuing operations.4.Shipping to the gigabyte Year-end sales cutoff tests are intended to identify misclassification of sales occurring sound the end of a clients fiscal year. Auditors get out typically involve a small sample of sales that the client recorded in the net few long time of the fiscal year and a comparable sample of sales that occurred in the first few days of the new fiscal year. Then, the relevant transferral and other accounting documents for those sales result be inspected to escort that they were recorded in the proper period. This standard test might have revealed the fact that Campbell was booking virtually grotesquely large sales unaired the end of accounting periods.Even though the shipping documents for these sales might have suggested that they were valid period-ending sales, a curious auditor might have  canvassd the sales further. For example, that auditor might have attempted to deposit whether the resulting receivables were collected on a incidentally basis. During the course of such an investigation, the auditor would likely have discovered that the sales were change in the following period or dealt with in some other unacceptable way.Accounts receivable confirmation procedures might also have resulted in the stripping of these sales. Customers to whom such sales were charged would likely have identified them as differences or discrepancies on returned confirmations. Subsequent investigation of these items by the auditors may have revealed their true nature. As pointed out by the plaintiffs in this case, during physical stock certificate counting procedures auditors typically take reveal of any inventory that has been segregated and not countedfor example, inventory that is sitting in put trucks. If there is an unusually large amount of such segregated inventorywhich was manifestly true in this case, the auditors should have inquired of the client and obtained a reasonable explanation. The old, reliable see year-end transactions to identify large and/or unusual transactions might also have led to the discovery of Campbells sales shipped to the yard.Guaranteed sales During the first few weeks of a clients new fiscal year, auditors should review the clients sales returns and allowances account to determine whether there are any unusual modes apparent in that account. Auditors should be peculiarly cognizant of unusually high sales returns and allowances, which may signal that a client overstated reported sales for the front accounting period. Accounts receivable confirmation procedures may also result in auditors discovering an unusually high rate of charge-backs by the clients customers.In some cases, clients will have written contracts that document the learn features of sale s contracts. Reviewing such contracts may result in the discovery of guaranteed sales or similar transactions. Finally, simply discussing a clients sales policies and procedures with client forcefulness may result in those force play intentionally or inadvertently tipping off auditors regarding questionable accounting practices for sales, such as shipping to the yard or guaranteed sales.5. Here are definitions of negligence and recklessness that I have referred to in suggested solutions for questions in other cases. These definitions were taken from the following source D.M. Guy, C.W. Alderman, and A.J. Winters, Auditing, fifth Edition (San Diego Dryden, 1999), 85-86.Negligence The failure of the certified public accountant to perform or report on an engagement with the due professional parcel out and competence of a heady auditor. recklessness A serious occurrence of negligence tantamount to a flagrant or reckless departure from the standard of due care.After reviewing the def inition of negligence, ask your students to narrow or describe a prudent auditor. Then, ask them whether they believe that definition/ definition applies to the PwC auditors assigned to the 1998 Campbell audit.Here are cardinal hypothetical examples drawn from this case involving what I would characterize as reckless auditors.A client employee tells PwC auditors that many year-end sales are guaranteed and that no reserve has been established for the large amount of returns that will likely be produced by those sales. PwC decides not to investigate this allegation because of manpower constraints on the engagement. small-arm reviewing receivables confirmations returned by Campbell customers, PwC auditors discover that approximately fourth of those customers indicate that their balances include charges for large amounts of product purchased near the end of the year, product that they did not order or receive. PwC dismisses this unusually large number of similar reported differences a s a coincidence.6.Here is a list of list parties that have been affected by the PSLRA.Investors who receive large losses that they believe were caused by reckless or fraudulent apportion on the part of a given companys management team, its auditors, or other parties associated with the companys financial statements. At least some of these investors have likely found it more difficult and costly to recover their losses because of the barricade to securities lawsuits erected by the PSLRA. Note Granted, the PSLRA has little impact on the ability of investors to recover losses in those cases involving obvious gross fraud or malfeasance by corporate management or other parties.Some parties have argued that the PSLRA diminishes the boilers suit efficiency of the stock market. These parties argue that by making it more difficult for investors to file lawsuits under the 1934 Securities Act, the PSLRA has resulted in a large portion of scarce investment detonator being squandered by exacting corporate executives, which, in the long run, diminishes the volume of our economy and our nations standard of living.Generally, corporate executives have benefited from the PSLRA since it has reduced, to some degree, their scene to civil liability.As pointed out in the Health Management, Inc., case (Case 1.4), the PSLRA apparently has not been very beneficial to large accounting firms. For whatever reason, in recent years, there has been a general upward trend in federal securities cases alleging accounting irregularities. Not only are independent auditors more likely to be named as defendants in such cases, the settlements in those cases tend to be considerably higher than in other lawsuits filed under the federal securities laws.