Garbo, Karla Jane R.

April 16, 2019

UNITED STATES SURGICAL CORPORATION

I. KEY FACTS
1. USSC’s management was growth-oriented and was managed by an aggressive chief
executive.
2. USSC’s dominance in the surgical stapling industry was being challenged in the early
1980s by several competitors and the need to raise additional capital to fend off it and to
finance its expansion plans for the future emerged.
3. An incentive compensation scheme for its key executives was tied to reported earnings.
4. There were significant changes on an absolute and relative basis in between 1980 and
1981 in the year end balances of several USSC’s key accounts.
5. Ernst & Whinney apparently failed to obtain and review a copy of the standard
employment contract signed by USSC’s sales employees, which would have provided
important evidence regarding the validity of “sales” made by the company to those
employees.
6. USSC improperly accounted for a large amount of production expense realizing them
as “tooling modification” expenditures and capitalizing them in a long-term asset account.
7. Some of USSC’s vendors were involved in the fraudulent deferred tooling expenditures
scheme.
8. Much evidence was collected by Ernst and Whinney to support the validity of the
questionable deferred tooling costs failed to support the client’s position regarding those
costs.
9. Although the SEC found that USSC officials had lied repeatedly to the audit engagement
partner, the federal agency sanctioned that partner and maintained that he and his
subordinates should have discovered USSC’s fraudulent financial statement
misrepresentations.
II. SWOT ANALAYSIS
a. STRENGTH - USSC was run by an ambitious and aggressive chief executive making
rapid growth possible in the early run of business and was able to dominate the surgical
stapling industry in less than a decade.
b. WEAKNESS - USSC’s chief executive’s aggressiveness became its weakness as well.
The promises he made in order to close deals with investors has put the company in deep
mess because he had to reach the target through whatever means necessary.
c. OPPORTUNITIES - USSC’s key officials could have prevented the big mess to happen
if they only have not settled with the incentives they are getting. They are enjoying it,
yes, but it ironically put them in jeopardy in the end.
d. THREATS - USSC’s rival in business, Alan Blackman, who’s also a driven entrepreneur
determined to dominate US market. Competitors triggered the decision of USSC to
misrepresent key accounts materially and get involved in a fraudulent scheme just to
excel.

III. RECOMMENDATION
USSC should have not come into extreme decision to misrepresent key accounts just to
surpass their investor’s expectation. The auditor-client disputes, if not managed by
auditors properly, can also have serious implications for the quality of an audit thus there
is a need for Ernst and Whinney to employ analytical procedures during the planning
phase to identify high-risk account balances, to weigh carefully conflicting evidence
collected during an engagement before rendering a decision regarding material accuracy
of the account balance in question and to investigate thoroughly all potential
misrepresentations discovered during the course of an audit. The conglomerate, Tyco
International Ltd. Analysts, should have carefully scrutinized the important factors before
deciding to takeover USSC. Considering USSC’s history, they should have at least double
think. In the end, they are the ones paying the damage that USSC made. The SEC should
have imposed a much more heavily deserved penalty because of the abusive accounting
methods. It would appear that they lightly tolerated the malfeasant behavior in the future
on the part of other corporate executives.
Karla Jane R. Garbo April 16, 2019

HAPPINESS EXPRESS INC.

I. KEY FACTS
1. Brothers, Joseph and Isaac Newton created Happiness Express in 1989 with only
$10,000 as investment.
2. Their infamous company motto is “In Kids We Trust”
3. Happiness’s business model involved identifying trendy characters which includes
Barney, Ariel and Power Rangers.
4. The company go public on July 1994 with an IPO of $10, and this nearly doubled just
a few months later.
5. Barney merchandise accounted for 55% of total revenues.
6. Happiness was named as the “#1 Hot Growth Company” in the spring of 1995. Barney
sales took a sudden decline, however, Power Ranger Merchandise produce 75% of
revenues but then it sales fell drastically during the fall of the same year.
7. Large class-action lawsuit was filed against Happiness and its officers as they allegedly
distorted their financial statements and were involved in inside trading.
8. With the continuous fall of sales, management is forced to issue an earnings release
stating that they will report a loss. SEC also seizes accounting records and documents
while Coopers and Lybrand withdrew 1996 audit opinion. The company also filed
bankruptcy and fired Isaac. Joseph resigned two days later.
9. SEC filed criminal complaint against Joseph, Isaac and Michael, as well as his landlord
friend.
10. The class-action lawsuit was settled on January of 2002 with $1.3M as contribution
of Coopers & Lybrand. The said amount was split among former stockholders and their
attorneys.
II. SWOT ANALYSIS
a. STRENGTH – The positive sales forecasting encouraged Joseph to give his all in order
to reach the targeted sales. Their target approach in the market is also optimistic in
nature. They relied on kids to tell other kids about the toys that they will bought that’s
why they have “In Kids We Trust” as their motto.
b. WEAKNESS – I think one of the company’s weakness is that they really focus so much
on optimistic forecasting without considering risk factors. They do not have planned
actions in case their forecasts will not be met.
c. OPPORTUNITY – Having Sarah Ferguson is seriously an advantage to Happiness. Their
knowledge against competitors have also put them on top of the industry. However, they
should have been more careful with numbers in order to have no huge backlogs.
d. THREATS – SEC’s confiscation of their accounting data has put the company in the
negative. The discovery of fraudulent actions made them suffer especially when they
admit to it having to report a big amount of loss rather than the forecasted income.

III. RECOMMENDATION
It has always been a puzzle to me as to why the other brother has been dismissed
and was found innocent of all charges when it’s very clear that the fraudulent scheme
would not be able to push through without his knowledge. The audit firm, Coopers and
Lybrand should not neglect professional skepticism next time. It was very bad of them
having relied solely with last year’s financial statements and not look the present period
independently. Confirmation is one thing. They should have confirmed those receivables
if it indeed existed.