The Fraud
The Leslie Fay Companies, which is a manufacturer of women’s apparel, was founded by Fred Pomerantz. It was named after Fred’s daughter, Leslie Fay. The company is based out of New York, and Fred Pomerantz made the company public in 1952. Paul Polishan, who became CFO and senior vice president of finance, was hired personally by Fred Pomerantz. However, Fred Pomerantz ended up taking the company back to a private entity for a few years in the 1980’s due to a buy out from his son John Pomerantz. The Leslie Fay Companies became public again in 1986. The market for women’s apparel was going downhill due to the recession from the 1980’s through the 1990’s. Several large chain were forced to merge with other competitor or to liquidate as well as its major competitor, Liz Claiborne, whose revenue faced slowing sales from its major product lines and was eventually forced to take large inventory write-downs. In 1989, Leslie Fay incurred a substantial loss when it wrote off a receivable from Allied/Federated Department Stores after the large retailer filed for bankruptcy. Despite the trauma being experienced by its key competitors, Leslie Fay reported impressive sales and earnings throughout the late 1980s and early 1990s. To make his major customer happy Pomerantz had to approve significant markdowns in Leslie Fay’s wholesale prices and grant those customers large rebate. In 1993, Donald Kenia, the company’s controller, took full responsibility for a large accounting fraud revealed to the press by John Pomerantz. Leslie Fay’s earnings had been overstated by approximately $80 million from 1990-1992 and about $130 million entries were fake. Upon the investigation of the Audit committee it was found out some audit tricks in the company like inflated number of inventories and failing to accrue period-ending expenses and liabilities and pre-recording orders received. Also in 1993, shareholders filed law suit against management and auditor BDO Seidman. BDO Seidman’s red flags