Question

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 2014, 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 2014 and into 2015. By March 1, 2015, AOW had billed Accord $ 265,000 for the litigation support work.
In November 2014, AOW started the audit work on Accord’s financial statements for the fiscal year ending December 31, 2014. 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 car-ried 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 share-holders 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, 2015.
AOW then billed Accord for the $ 200,000 audit fee and sent a reminder for payment of the $ 265,000 consulting fee; both billings were dated April 2, 2015.

Required:
a. Was AOW independent for the audit of Accord for the fiscal year ended December 31, 2014? 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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  • CreatedOctober 27, 2014
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