Leslie Fay
The Leslie Fay Companies (Leslie Fay) was a designer specializing in women’s stylish dresses. The company was run by Fred Pomerantz and subsequently by his son, John Pomerantz. Both Pomerantz men were known for their lavish lifestyles and overbearing personalities. Fred had hired Paul Polishan right out of college in 1969 to join the accounting staff at Leslie Fay. Polishan would later go on to become the company’s CFO. Polishan, as it seemed, had an even more overbearing personality than either of the Pomerantz men. The personalities and attitudes of these three men would bring about a huge fraud scandal for Leslie Fay, resulting in a Chapter 11 bankruptcy filing in April 1993 (Knapp, 2011).
Leslie Fay’s income was determined to be overstated $80 million over a period of just three years, 1990-1992. The overstatement of income was the result of over $130 million of fraudulent accounting transactions. Inventory was the main focal point of the Leslie Fay fraudulent activities. The fraud included inflating the number of dresses manufactured each quarter, creating fraudulent inventory tags, and overstating inventory by creating in-transit inventory shipments that didn’t exist. The fraud extended beyond inventory, however. Recording advance sales, not accruing expenses, not writing off bad debt, and not recording discounts on receivables were also amongst the fraudulent entries (Knapp, 2011).
The end goal of the accounting manipulation was to maintain historical financial ratios formally reported by the company. The problem with maintaining the ratios was that it would have not been economically feasible to maintain them in the economy that was present during that time. Not only were women starting to dress more casually, and therefore not desire Leslie Fay’s product line any longer, but retailers were also no longer interested in purchasing the company’s line. The retailers described Leslie Fay’s product as outdated, overpriced, and drab. The
Leslie Fay’s income was determined to be overstated $80 million over a period of just three years, 1990-1992. The overstatement of income was the result of over $130 million of fraudulent accounting transactions. Inventory was the main focal point of the Leslie Fay fraudulent activities. The fraud included inflating the number of dresses manufactured each quarter, creating fraudulent inventory tags, and overstating inventory by creating in-transit inventory shipments that didn’t exist. The fraud extended beyond inventory, however. Recording advance sales, not accruing expenses, not writing off bad debt, and not recording discounts on receivables were also amongst the fraudulent entries (Knapp, 2011).
The end goal of the accounting manipulation was to maintain historical financial ratios formally reported by the company. The problem with maintaining the ratios was that it would have not been economically feasible to maintain them in the economy that was present during that time. Not only were women starting to dress more casually, and therefore not desire Leslie Fay’s product line any longer, but retailers were also no longer interested in purchasing the company’s line. The retailers described Leslie Fay’s product as outdated, overpriced, and drab. The
References: Auditing Standards Board (ASU) (2002). AU 316: Consideration of fraud in a financial statement audit. Retrieved May 25, 2012 at http://www.aicpa.org/Research/Standards/AuditAttest/Pages/SAS.aspx Knapp, M.C. (2011). Contemporary auditing: Real issues and cases, 9th edition. Mason, OH: Cenegage.