cAsE

l3

AMRE, Inc.

In the popular movie The Tin Men released in 1987, Richard !-reyfus and Danny
DeVito portray aluminum siding salesmen during the early 1960s. The two competitors use every means possible to obtain an unfair advantage over each other.
Like other aluminum siding salesmen, the key to success for Dreyfus and DeVito is
obtaining and vigorously pursuing "leads," or indications of interest from potential
customeis. Leadi are not only a key success factor for homb siding companies but
also figure prominently in many of these firms accounting and control systems. Take
the caie of AMRE, Inc., a firm that for nearly two decades sold home siding and
interior refurnishing products such as cabinet countertops. AMRE, short for American
Remodeling, began operations in 1980 in lrving, Texas, home of the Dallas Cowboys.
Within a few years, the fast-growing firm ranked as the largest company in the home
siding industry, an industry historically dominated by small b,r,rsinesses that.market
their services in one metropolitan area. [n 1987, AMRE went public and listed its common stock on the New York Stock Exchange.
AMRE's principal operating expenses were advertising costs incurred to identify
potential tlaas via direct mail and television commercials. Throughout the 1980s,
AMRE charged a portion of its advertising costs each year to a deferred expense
account. AMRE justified this accounting treatment by maintaining that these adverUenefited future periods. gain accounting period, AMRE divided its total
,irinn
uar,""r,iring costs by the nurnler of ners leads generatecl that perincl AI\4RE tllen rnul"
"unset leads," that is, new
tipliecl the'r'esuiting "eost pei'lead" by- the totai nutrber of
of advertising costs to
amount
the
pursued,
to
determine
yet
been
not
Ieads that had
period to its advertisfof
t[1at
costs
aclvertising
ti-re
iemaining
charged,
f,rm
a"f"r in"

-r,r

ing expeltse account.

ln,rng cr:eated a computer-based "]ead bank" during the mid-]980s. When a
p,otential customer collacted ANIRE a,-lerk eollected ancl thert etrtet'ecl informaIit,il irrtlre lead l,arik thJl < t,ultl lrv used ru develop an approptiale.sales pitch for
that individual. This information included variables such as age, income, home
market value, and length of residency. Data for each sales presentation were also
entered in the lead bank. This information allorved AMRE to evaluate each salesperson's performance by computing measures such as sales as a percentage of
appointments, cancellation rate, and average dollar sales per appointment' The
cbntrol functions and data provided by AMRE's computerized lead bank contributed significantly to the company's eaily success in the intensel)' co.Oatt,ive home

Accounting for "Leods" Leqds to Trouble

When AMRE went public in Fe[ruary 1987. lhe company's top officers gave optimistic rerrenue and profit projections to linancial analysts trackfng the firm. (At the time,
AMRE's fiscal year ran from I\'lair 1 01 one lrear until April 30 of the next' The company'5 first fiscal year as a public company, fiscal 1988, ended April 30, 19BB) As the
end of AMRE',s first quarter as a public compan]/ approached, July 11, 1987, the net
income projected for that qual'ter ea rliei in the Vear rv:rs cleatly unattainable-

SECTTON

ONE

Cotr{pneHei{sMr C.qsEs

Robert Levin, an AMRE executive and major stockholder, feared that AMRE's stock

price would drop sharply if the company failed to reach its forecasted earnings for
the first quarter of fiscal 1988. Levin, a CPA since 1972, served as the company's

principal financial officer and held the titles of executive vice-president, treasurer,
and chief operating officer. To inflate AMRE's net income for the first quarter of
fiscal 1988, Levin instructed the company's chief accounting officer, Dennie D.
Brown, to overstate the number of unset leads in AMREs computerized Iead bank.l

Brown, in turn, instructed Walter W. Richardson, the company's vice-president of

data processing who had served as AMREs controller in the early 1980s, to enter
fictitious unset leads in the lead bank. Entering the fictitious leads in the lead bank
caused a disproportionate amount of AMREs advertising costs for the first quarter

of

1988 to be deferred rather than expensed. This accounting scam allowed AMRE

to overstate its pretax income for that quarter by approximately $1 million, or by

nearly 50 percent.
Once corporate executives misrepresent their firm's operating results for one
accounting period, the temptation to manipulate its operating results in later periods becomes difficult to resist. ln the second quarter of fiscal 1988, AMRE's executives again inflated the company's unset leads to understate the firm's advertising
expenses.
During the third and fourth quarters of fiscal 1988, AMREs actual operating results
again fell far short of expectations. At this point, Levin decided to expand the scope
of the accounting fraud. In addition to overstating unset leads, Levin instructed his
subordinates to overstate AMRE's ending inventory for the third and fourth quarters
of fiscal 1988. Richardson complied by entering fictitious inventory in AMRE's computerized inventory records and by preparing bogus inventory count sheets that were
Iater submitted to the company's Price Waterhouse auditors.
Ler in also instructed AMRE's accounting personnel to oveistate the company's revenue for the third and fourth quarters of Hscal 1988. AMRE used the percentage ot
completion method. to recognize re\/enue on unfinished installation jobs at the end
of an accounting period. To overstate the revenue booked on unfinished projects at
the end of fiscal 1988, AMRE grossly overstated their percentage of completion. ln
fact, AMRE recognized revenue at the end of fiscal l9B8 on customer projects that
had not been started.
AMRE reported a pretax income of $12.2 million in its fiscal l9B8 financial statements. A subsequent investigation by the Securities and Exchange Commission (SEC)
revealed that AMRE's actual pretax income for that year was less than 50 percent
of the reported figure. Before AMRE fited its 1988 l0-K with the SEC, Levin met with
AMRE's chief executive officer and chairman of the board, Steven D. Bedowitz. At
this meeting, Levin admitted to Bedowitz forthe first time that illicit accounting methods had been used to overstate AMRE's reported profit for 1988. According to the
SEC's investigatioq Bedowitz "concurred with these efforts to improperly increase
AMRE's earnings."2

Bedowitz and Levin signed the "Letter to Shareholders" included in AMRE's

1988 annual report. That letter began with the following greeting: "We are proud

1. The information repolted in this case rras drawn principally from a series of enforcement releases
issued b5. the Secrrrities and Exchange Commission (SECt in the earlv 1990s. The individuals involved
in this case neither admi.tted nor clenied the facts as represented by the SEC

2. Secr-rrities and Exchange Commission. -4ccounthg and Auditing Enforcement Releose No. 356,

l\iare

[992.

CASE

I.3

AMRE,INc.

ar(

to announce that fiscar rggg was

another record year for AMRE in
both earnings
and revenues'" In- a subsequent AMRE
annual report, Levin recatted how
he had
met Bedowitz in r9gr, severar years
before t urin a"clp;;;; executive
position
with AMRE. At the rime, Levin worked
for a buirdirg

il;il;ompany

AMRE supplier.

We discouered

k! y

ue:? uery much alife,

and dreams. aur partnership wis

ineiitaOte.,
Price waterhouse issued ar unqualified

We

that was an

both hod a lot of energy, ombition,

opinion on AMRE'S financial statements

for

fiscal 1988. Neverrheress, a financiar;r"rr"

tor The
credibititv of those financiar statements.iih"

w"i yii'n*rquestioned

the

,hat AMRE,s use of

the percentage-of-compretion accouniing
metrrooieemed unrruur. Businesses
typi_
cally use the percentage-of-compretion
nietrroa
on projects that
take severar months, if not years,
to .on,pi"tu. AMRE'' i.*turrution;obs
required onry
a few days to comprete. Even more
,rouiiing to the analyst was the three
weeks of
"unbiiled revenue.s"lhat AMRE
h"d
on unnnisnuJiirtuuution jobs near
the end of r988. That figure ru"*"a
Lr.-.rsive since AMRi,;;;;..ge time
ro complete an instailation job was
on" *""t . it e analyst arso questioned
AMRE,j adver_
tising expense fieure.!r
.o,,pun1,;,
adverrising cosrs
had been rising rapidrv. tn

"r;i;;oJri"J"r,
g.".rdJ" r;;ue

;.;;;i^a

AMRE's

irtriirg;;;;;"
rr*,iu.y,

fi

nancial statements.

,t*

Tb shorbse'ers, it rooks rik-e

o classic
expenses, a pattern that often ends
in'o

;;;;;;

"r"rvriili*;;ffi:#d

p**l:

orrnrting

rhe integrity of

reoenues

understating
,li* ,ri ur."v,f"rr"nii"i,andount
spokes-

personl said the compony's

orrorrtirj prartices' were
prop",
vvv, u,tu
-- -' - r'
oniirr"
&
periodically
reuieued with outside auditors.s

AMRE's 1989 Fiscot yeor

During fiscar l9gg, AMRE's executives
became increasingry concerned that
their
indisc'etions woLrld be discovereO.
fn ,n"lf,ira qrurt"r'oi;ir";;,
il
##j:
tors decidecJ to end the,account;rt
n-;;1'The executives met regurarry to
discuss
how best to tei:minate the fraud
*,rr"r,
i.irlng the suspicions of the firm,s Fr:ice
v\/aterhorrspariditorsoncl ,rthe'pur,i"r
on"ier rrocr theexeculivessettledonwasto
t'ansfer'ficritious assets in Aiil#i,j.i;oiing
.".o,os ro rhe firms Decks division.
That division's principar

line of urri""* *"r buirding backyard

decks on residentiar
homes. company officiars r,aa
ar.eaJy a".ia"a a"
in"
o."r, division. By
transferring approximately
"iirlrri"
$3 million ot n.titio* assers
ro
AMRE ,,buried" the write-offs of thos! utt",r in'ir,"
iir.ontinu"a operations section of its l9g9
AMRE booked ,r,"ru,".i*offr,p;ir.i;"li;arrrg,,,"

ihr;;;;"r,

ffi:T;'d;:enr.

third quarter

company executives wrote off approximately

$5 million of additional fictitious

assers as losses ot expenses in.

the fourth

These write-offs ancr

l""r.r^"j'::l,t
AMRE's 1989

{.

F. Nnr

5. lL,irt

rho:" gJ]ru

pr;;ilr

quarte-inr."iliig"g
q;"rrer resurred in

# ffi;;;;;;;.*
reporting

a net
$6 milrion for 1989. Exhibii t iJ.*urirus
key financiar
^MREdata incruded in
annual repor.t for rhe nu"_y"u.
f".iod 1985_19gg.

ris. Aj\lRE Drarrinqshor ,Sellcrs.,, Ttte

Neu,yotk Times.lg Dccernber

l9SB, DB.

SECTION

ffiIBlT
ay

oNE

CoI{pnrHsNsIVE CASES

I
Year Ended

FIIvANcT.AL

ron AMRE,
c., 1985-1989

nr,q,

Contract revenues

ruousatos)

Contract costs
Gross profit
0perating income

1987

1989

1988

$183,885

$121,,033

64,702

41,,369

{72,18V
25,017

179,78!
7,602

79,664

47,77A

9,983

6,153
2,907

Net income

(5,744\

Working capital
Totat assets
Stockhotders' equity

11,779
50,399
27,774

7,299
15,307
34,713-

23,565

73,236
23,527
-16,895

Aprit 30,
1986

$3e,575

75,275
24,300
7,576
878
40
7,239
7,334

1985
$22,451
9,259
73,792
667
414
L75
2.477
456
;

The Role of AMRET New CFO in Terminoting

the Accounting Froud
In March I989, near the end of AMRE's fourth quarter of fiscal lg8g, AMRE hired Mac
M. Martirossian to serve as the company's chief accounting officer. Marti;;:;;,
cPA since 1976, had more than I0 years of public accounting experience with the
Dallas office of Price waterhouse, which performed AMRE'sinnual audits. In July
1989, Martirossian assumed the titte of chief financial officer (cFo). Levin,
who hai
essentially served as AMRE's CFO for several years, retained the titles of executive
vice-president, treasurer, and chief operating officer.
while becoming acquainted with AMRE's accounting system in his first few weeks
with the firm, Martirossian discovered numerous aciounting entries that lacked
adequate documentation. Marti rossian immediately began inveiti gatin g this obvious
inler,natr conti:oi: pi:oblerr. No croubt, A\,lRE s top eNecuiiv.es realizld thit the.inquisitive accountant would eventuall5., "put two and two together." So,, they decided to
reveal the frar:d to Martirossian.'(Recognize
--o-"-" thar biu thls pointlnl uri*,r"";-rr;;
alreadl' begun terminating the fr",idj
The startling confession made bir his ner,r, colleagues stunned N{artirossian. On
April 28. 1989, jusr rwo days before the end of fiscat t5g9, Martirossian calteJ a meeiirrg r.r'ith llrp ereculires invoh.ecl in llre fraud. Af this meetirrq. he insisted tnut in"
misstatements remaining in the companl,'s,accountingr".or;: 0"
rected. If the corrections were not made,-Martirossian Ihreatened to resign.

fm;a[*fl,';;"

Mortirossian further stoted that he woutd hotd'himself responsible for the company's
finonciol statements for periods after fiscol tggg, but thrt th" scheme,s participants
would be responsible for correcting the misstatements in the periods to which rhey
related, and for oddressing ony questions [from AMRE's independent auditors qnd
other portiesJ arising from the corrections.G

Bedowitz acquiesced to Martirossian's demands. Initially. the two men decided to

correct AMREb accounting records with a large prior p"iioa adiustrnent. I; ;;;;
ter of days, this plan backfired. outside direct,orson etuna's board became aware
of the prior period adjustment and began questioning why it was necessary. At this
poinl, AMRE's executives, including Martirossian, mei to consider other alternatives
for correcting the compan)"s accounling records. The executives decided that the

6. Securities and Excheinge Commission.

30

Jr

rrrp

1992.

.AccoLrnting ond.lu(liting Enforcemcnt Release Na. 3g4.

cAsE t.3

AMRE, tNc.

cti!a
remaining errors in AMRE''
accounting records wourd be
written off against the
q
ua

rtei

ir

ri,

cJr iiig

:: ffJj::
"iutJeli,oa_",
shortly after the end of fiscal 1989,
Martirossian attended several
meetings between
AMRE'S top executives-and
repres"rr"ri"", of price w"t rh;;.
At these meetings,
the Iarge accounring adjustments
rn"J" g,fnE au.infif,"i"rnn quarrer
of fisca[
I9Bg were discussed:. A""rrai"gi.
ry
i;; sEi,
u"ni.*"i"r"r"ior"rnr rt 1e orher com_
provided false explanations

:j *;,?,:.'

:f,:,,:j:

o in

ad j u st i n

to Price waterhorr"."gu.airg
the large

ffYrrffilfves

The efforts of his colleagues

to mislead the price waterhouse
auditors troubred
Martirossian' Before Price fraterho"r".o.pr"t"a
itr
igs'9""rdiiri*nr,
Martirossian
arranged a confidential meeting
at a local hotelwr,r, r,"y p.i""
iaterhouse
personnel
assigned to the AMRE audit. Mirtirossian
t aa become well acquainted with
several
of these individuars during rh"
r0
he worked ro, pii..iuterhouse,s
Daras
office.

t;;;

At

this meeting,

M:r:,,:?::,i,n expressed o high

ond he specificarv stated thot pontiriii'ii teoel of anxiery regording rhe oudit,
o
,iir'ri.Zri''ri,o"i* ,oss the smer.
test'" Further, he orso posed;r;t;;r;;;
,r,e.auditors tnrt tiin"f,ri)*ingry
unrerated
oudit issues ond euents to the odjustmrir-ii
i, ,o"^ii iirzit-t-he auaitors to the
undisctosed scheme

[occourtirj'iiiii;,'"

,,

Although he hinted strongly

to the auditors that AMRE,s fourth-quarter

write_offs
were suspicious, Martirossian
never reveared the trueiaturl'o,
of those
adjusrments' price waterhouse.
ouroor"
urtimaterr
,"*j*nn_quarrer adjust_
ments before issuins an unquarified
1rr"
".""g,."g
opinion on AMRE,s 19g9 financiar
statements.
Fo,owing the comprerion or the
rgag
sentations add'essed to price war"rrro,,s.-ihi"raii, r.u"r'i"a"i;;;r,,*; , re*er or repre_
he a,cl othcr r<e,,
AtulRE exec uIir .s rr t-r e rru,
r""*r Jgu rarities that wourd materialj_v affect
the
accuracy of Ihe company.s financiat
statements.
Durinq fiscar I990. r\ia'tirossian
,^a"u""rr'r, extensive effort to improve AMRE,s
accounring and financiai

rvr;;;#r;;;;;i;

.;;,; ;

;;;;;';;''r,,.i,"r, r;l';;;;;, ,;.i;;""cr imprementing

il; ;;;;;n,t iri",rul';;;;;;l;rr,.m. Marrirossian atso sear.crred .re csrnppn1,,,
o..o,,niin;,;;;;;; ;;, :;i:',:- ' , ng er.r.ors
re'ie*'ect the co,pan,'r u..o*nii;;;;;;;r
a,d
ro ensur.e r'at thel,were being prop_
seve'at measrr-es to srrengrhe,

erly applied.

The Froud ls Disclosed publicly

1990, the sEC'revealed^ that jt
was investigating AMRE s financial
statements for the
previous fewyears. The Nea yorn
rime, iiicre in late rg8s thil;ilenged
AMRE,'
In

financial data prompted that investigu*irr-1"

a special committee consistinq of th'ee outside
rr'"rrr"" "rly
iti board ," ,.rr,irlr" the company,s
financial affairs. Foilowing il .epoiioiir,o"io-*ittee,
"r
AI\4RE pubricry r,eveared that
irs financiar statemenrs Iorreach
"
rggz ihrJugh

lssi,;ffi'f".*"a

r,"rr
rgg0, bLrt principaily lgg' and
Iggg,
contained mateiiar errors. err,lig
,".tutuJ-it. financial statements for
each of those
years From earr' r992 th.oLrgh
mid-r994, trre igc i*r"l r"*rri;i";"r.rr
rereases
disclosing the .esults of its ligtlrl,
irr,"riigriirn of AMRE,s accounting

r.

ll,ttd

.\l\4RE s fi rr.rrrcili .orrrlir rurr (.,,llt

ceaseci ,perations

ncr fi

jll jerl to,lelet intate rl

ltr.irrg ri're n ricl- l990s tn
rell tor in'oru.ta^. ban kr rptc_'.,.

frauci.s

1997. the companr,

il

sEcItoN

oNE

CournnHeNsrw CsEs

Each of the AMRE executives who actively participated in the fraud, including
Bedowitz, Levin, Brown, and Richardson, agreed to an SEC consent order. The
pledged
executives neither admitted nor denied their alleged roles in the fraud but
forfeited
also
Brown
and
Levin
not to violate federal securities laws in the future.
proceeds they had received from the sale of AMRE stock while the fraud was in

progr"r.. This feature of the agreement required Brown to pay approximately

to the federal government. Levin paid nearly $1.8 million to tlte.fgdelal q9vTrading
ernment, including a $SOO,OOO fine for violating the provisions of the Insider
Sanctions Act.
In November 1991, The Woll Street Journol reported that Bedowitz, Levin, and
by
AMRE, Inc., had reached an agreement to settle a large class action lawsuit filed
to
executives
AMRE! stockholders.e This agreement required the two formerAMRE
Inc.,
contributed
contribute approximatelv $a.5 million to a settlement pool. AMRE,
bfO,6OO

another $5.9 million to that PoolMartirossian reached an agreement with the SEC similar to the agreement made
agency
by the federal agency with the otherAMRE executives. However, the federal
{raud.
in
the
issued r"purui" enforcement release describing Martirossian's role

" criticized Martirossian for not insisting that proper measures be taken
The SEC
to correct AMRE's accounting records and for not disclosing the fraud to Price
Waterhouse.
Martirossian's non-participation in the originol fraudutlent Yl"^" connot iustify his
material
rrctions in turning a blind eye to the methods utilized by AMRE to correct the
questions
to
AMRE's
posed
and
concern
misstotements .-. . Akhough he expressed
Martirossian's
them,
t9
scheme
the
of,
existence
the
i*pot"
to
attempt
ouditors in on
effort to discharge nL auty to make accurate and complete disclosure n !Unr'1ay(i'
of the
fott-s tritts ineffeetu.tt enr! misleac[inq beeeuse he'fai[eel to prouide the auditors al[

*i nrii, i o,

e p o ssessed.ro

SEC lnvestigotes Price Woterhouse's 1988

ond 1989 AMRE Audits
After the SEC finished dealingwith AMRE's executives, the fe_deral agency-turned
it, ii,*r,tiun io the compn,,1,"i ind"p"ndent audit firm, Price.Water}'iouse.
??_C
focused on the conduct of two members o{ the AMRE audit engagement team,

nf

partEdward J. Smith and Joel E. Reed. Smith served as AMRE's audit engagement
ner, while Reed was a senior audit manager assigned to the AMRE audits.
Among the SEC's complaints lodged against Price Waterhouse was that the audit
firm failJd to properly teit ,qURg's deferred advertising expenses' Recall that AMRE
period by multi"
computed theadvertising costs to be deferred for a given accounting
"unset
leads" at the end of
plying the "cost per lead; for that period by the number of
ii L p""uioa. One method AMRE used to inflate its reported profits was to,create fictitious unset leads. Staff auditors of Price Waterhouse assigned to the AMRE en$a$e:

ment verified the cost-per-lead computation during the lgBB audit. Howev:t-:rl".tPff
at the
auditors failed to adequately test the nurn-ber of unset leads reported by AMRE
two
on
leads
end of fiscal 1988. The auditors simply compared the number of unset
client-prepared schedules.

9. K. Blr,rmenthal,

',{N4RE, Ex-Officem Agree to Settlement of Stockholder Lan'suit," The

,lournctl,l2 Novenrber

ltall

Street

1991. A13.

10. SecuritiesanciExchangeConmission.-4c(-ountingrtncl
ll0.lLrne 1992

.AuditingErtfotcenentReleaseNo

394,

CASE

t.3

AMRE, [vc.

.,at

The oudit of the unset reads

defenor was flaw,ed.because
no procedures r.ere Der_
rormed to uenrv the intesitv
on which
rn
were not supported bv undertyine,irn.
attniiin,ii:irii"iZlirrr", ract, the reports

ri;i;;;;;;

th";;;i;i;;;.

teods suppos_

illi"!#';;;;E:;!,*#tr!;1,:;:,!"';;;';a%"ir,,*";iii'iii,3t,ssaj,

,iilii,

Price waterhouse's audit pranning

memorandum for the Iggg
AMRE audit indicated that EDp audit procedures
*oir,riu
used to test the integrity of
bank' AMRE executives irrorra
AMRE,s Iead
inir,i"accotrnting r'urJr""r"a
that these proce_
dures wourd resurt in aetectron
oi rr" il,iri"u. ruuJl;*il;;;ank.
These execu_
tives persuaded Smith and
n*O ,.'nyp;r, the EDp tests. ,
AMRE arso inflated it'uportuJfio?iJ
u19""*airs year-end inventory. During
fiscar 1988, AMRE's inveyrrv
ov zrs p*"ri,"rir,i['rrL,n.ruured
cent and inventory purchases
68 per_
in.r"ur"aio. p";o;;.
audit plannino
memorandum identified the
rarge increaruin i*.nto.y
ui",
pranning memorandum
factor. The audii
ur* pJiri"a'"iiir,r, an,,neiii
perpetuar
inven_
n,,r that the year-",Jinuun,o,y
;;;,,,"0 o" determined by
Price waterhouse's initiar audit
pran for-r9gg cared for
the observation of the

ir"*[.i

i;;igiffinu
*
,il
*ii'r;',
;;;ffi

:H;n:i:#;l
#:.;i;

j}Ij;:lTffi:[T,;::*i1,,"::1.11;a**',**uiou,y"uae.i.J

ma n ase me n t c ompra i n
e d rr, J,r*' i,
:
observed bv price waterhouse
".";g :ffiincrease;"";;or
;";il;;;;.iar5z
rhe 1988 audir.
AMRE's executives convinced pri".wui"riouse
to
allow
AMRE
accounting
nel to monitor the physicur
person_
.orro uilr,rue.3f t|_e^inventory sites that
had serected for observation.
the auditors
a..o.oing',;,r,. srct rrr"riis"iiin,
onrou management inflated the year-end inventon,of
o"o"n of rhs 19 ;r,,*"?r
ri"s
price
not o6srr.i*l.Lt
1"ear-end bv
warerhouse. irr"r" i,,r."rrory
rir", in.irJ;;',;" rhree sires n,here
AMRE accounting personn"r
our"rruo

:,jH#:i,ililil;,,,Tii:;

its^I988 year-end inventory

by $t.q rnif

:n*

ihelhysical counts. In totar, AMRE

overstatecr

llon.'

During the third and fourr[ qru,

,",r oinscar r9gg, AMRE began
n,riring off irs fi*itious assets. Recail rhat AMRE's
wrire-offs in rhe losses booked "^".r,i,,"rl"nceared ,*"", uii,iiirn doilars of such
ro,
o".r,_
"- 0,,,r,rllrn" price \\,arer.
ho*se aucriror, ,",,i",r.Jrh."L,-i;'i;#ri?i,r*,r*i,,
;ffination or AMRE,s
Decks division during nr."."l
r9S"S.
according to the SEC, rhe price
Warerro, i,"," iu,*i*i,r,,ur app,ying

,n";,;,ir,*i

"

H;;;;
lff:;:::i:?,:,?:::?::"*.*:$','"1,i#i,,,n,

while writing off fictitiou, urr"i,

Jrli"s'irr" fourrh quarter of r9g9, AMRE
purged
bogus unset reads r-, ,r,"
.r*priSrlr"a
r"rJ ulri. i;;rff;g" cost o[ these
leads was $r08.33. meaning
that the i"rrLl.r, rerared to tr,"iirriie_off
exceeded
$1.8 million. A price warerh"ouse,i"rr
asked an AMRE alcountanr
Iarge nurnber of unser
why rhe
"rila,
17,000

y;:;;i;;

readr
1.""#o from the read bank. .rhe accounranr
responded that the unset reads.h"a
irproperry recorded auu a an .,accounting
control weakness." In the audit
,orr,pup"ri',r," ,,.ri"rai,"].".".,r0"0,
the AMRE accountant's statement,
based on
,,isorated
tr,ut ir,i, i,weakness,, was
an
that did nor require rurrher
incident,,
irr"r,is.iil" ii'iri,n

u*,

*Ji"";:;.r;ilo

jl

iTiiJ;:t

12. tbid.

)3. tbid

and Exchange Comrnission

Acr ounting

ond .Auditing Enforcemerrr Retcose

,,,,,n rhe srarr

No j54

-"9

SECTION

ONE

Co{,rpnsHsNslvs CASES

auditor's assessment and did not require any further audit procedures to be applied
to the large adjustment.

The SEC also questioned Price Waterhouse's review of the quarterly financial
data included in AMRE's 1989 10-K registration statement. Near the end of the 1989
audit, Smith recommended that AMRE disclose in the l0-K the large period-ending
1".oflJin-s adiustments that were largely responsible for the company's net loss for
fiscal 1989. AMRE's executives refused. After reconsidering the matter, Smith noted
in the audit workpapers that the fourth quarter adiustments did not need to be disclosed separately.
Smith concluded thot the adiustments did not requhe disclosure because "the quarterty
data is not prt of the finonciol statements and the disclosure is informatioe only - -- the magnitude of the adjustments is not sumcient to couse us to require them to do it

[thot is, disclose the adjustmentsJ.aa

A key factor that reportedly influenced smith and Reed's decisions to accept
AMRE's questionable accounting treatments was their familiarity with Martirossian, a
former colleague of theirs in the Dallas office of Price Waterhouse. According to the
sEC, smith and Reed "relied improperly on his [Martirossian's] unverified repr"r"n-

tations based upon their prior experience with him and his reputation for integrity
within Price Waterhouse."r5
In an enforcement release issued in Aprii 1994, the SEC concluded that Smith and
Reed had failed to comply with generally accepted auditing standards during the
19BB and 1989 AMRE audits. As a result, the sEC prohibited Smith and Reed irom

being assigned to audits of SEC registrants for nine months.

Questions

l.

Define rhe terms ethics and professiorroLethrr^s. Using the following scale,
er,aluate the conduct o[ eacl-r indir.iduaf invoh,ed in lhis case,

-100.

1.

0........100

Hiqhh,

Highly

Unetlrical

Ethical

Do you belier.'e that the individuals who behaved unethicaily in this case were
appropriately punished? Defend your answer.

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 alternatirres would you have chosen? Wh},?
was AI\'trREi practice of deferring a por-tion of its adi,ertising costs in an asset
account appropriate? Defend you unr*.r.

11. tbid
15. Ibid

CASE

I.3

AMRE,IIc.

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?
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?
7.

sl^tlro. 3/, "Evidential Matter," identifies five management assertions that

underlie a set of financial statements- Whieh of theseassertions should have
been of most concem to Price Waterhouse regarding the large period-ending
adiustments AMRE recorded during the fourth quarter of fiscal 1989?
What responsibility do auditors have for quarterly financial information reported
in the footnotes to a client's audited financial statements?