Independence and Securities Exchange Act of 1934. Anderson, Olds, and Watershed(AOW) have been the independent auditors for Accord Corporation since 1990. Accord is apublic entity obligated to file periodic reports under the Securities Exchange Act of 1934.Beginning in January 2017, the AOW litigation support consulting division performed aspecial engagement for Accord. The work involved a lawsuit that Accord had filed againstCivic Company for patent infringement on microchip manufacturing processes. AOWpersonnel compiled production statistics—costs and lost profits—under various volumeassumptions and then testified in court about the losses to Accord that had resulted fromCivic’s improper use of patented processes. The amounts at issue were very large, withclaims of $50 million for lost profits and a plea for $150 million punitive damages. Accordwon a court judgment for a total of $120 million, and Civic has appealed the damage award.The case remained pending throughout 2017 and into 2018. By March 1, 2018, AOW hadbilled Accord $265,000 for the litigation support work.In November 2017, AOW started the audit work on Accord’s financial statements for thefiscal year ending December 31, 2017. During this work, AOW auditors found that Accord’smanagement and board of directors did not fully disclose the stage of the appeal of the CivicCompany case, had improperly deferred a material loss on new product start-up costs as anelement of its inventory, and had accrued sales revenue for promotional chip sales that carriedan unconditional right of return. As partner in charge of the engagement, D. Ward agreed withthe president that the accounting and disclosure were suitable to protect Accord’s shareholders from adverse business developments, and he issued a standard unmodified opinion thatwas included in the entity’s 10-K annual report filed with the SEC and dated April 1, 2018.On April 2, 2018, AOW then billed Accord for the $200,000 audit fee and sent a reminderfor payment of the $265,000 consulting fee.Required:a. Was AOW independent for the audit of Accord for the fiscal year ended December 31,2017? Explain.b. Did Ward and AOW follow generally accepted auditing standards in the audit? Cite anyspecific standards that might have been violated, and explain your reasoning.c. Did Ward and AOW violate any section(s) of the Securities Exchange Act of 1934?Explain
Independence and Securities Exchange Act of 1934. Anderson, Olds, and Watershed
(AOW) have been the independent auditors for Accord Corporation since 1990. Accord is a
public entity obligated to file periodic reports under the Securities Exchange Act of 1934.
Beginning in January 2017, the AOW litigation support consulting division performed a
special engagement for Accord. The work involved a lawsuit that Accord had filed against
Civic Company for patent infringement on microchip manufacturing processes. AOW
personnel compiled production statistics—costs and lost profits—under various volume
assumptions and then testified in court about the losses to Accord that had resulted from
Civic’s improper use of patented processes. The amounts at issue were very large, with
claims of $50 million for lost profits and a plea for $150 million punitive damages. Accord
won a court judgment for a total of $120 million, and Civic has appealed the damage award.
The case remained pending throughout 2017 and into 2018. By March 1, 2018, AOW had
billed Accord $265,000 for the litigation support work.
In November 2017, AOW started the audit work on Accord’s financial statements for the
fiscal year ending December 31, 2017. During this work, AOW auditors found that Accord’s
management and board of directors did not fully disclose the stage of the appeal of the Civic
Company case, had improperly deferred a material loss on new product start-up costs as an
element of its inventory, and had accrued sales revenue for promotional chip sales that carried
an unconditional right of return. As partner in charge of the engagement, D. Ward agreed with
the president that the accounting and disclosure were suitable to protect Accord’s shareholders from adverse business developments, and he issued a standard unmodified opinion that
was included in the entity’s 10-K annual report filed with the SEC and dated April 1, 2018.
On April 2, 2018, AOW then billed Accord for the $200,000 audit fee and sent a reminder
for payment of the $265,000 consulting fee.
Required:
a. Was AOW independent for the audit of Accord for the fiscal year ended December 31,
2017? Explain.
b. Did Ward and AOW follow generally accepted auditing standards in the audit? Cite any
specific standards that might have been violated, and explain your reasoning.
c. Did Ward and AOW violate any section(s) of the Securities Exchange Act of 1934?
Explain
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