Should the Coopers & Lybrand auditors have confirmed the receivable from West Coast Liquidators at the end

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Should the Coopers & Lybrand auditors have confirmed the receivable from West Coast Liquidators at the end of fiscal 1995? Why or why not? Should the auditors have included one or more sales to West Coast Liquidators in their yearend sales cutoff tests for fiscal 1995?

Coopers & Lybrand contested each of the allegations included in the class-action lawsuit. At one point, the firm's legal counsel charged that the allegations involved no more than "nitpicking attacks" by the plaintiff attorneys. U.S. District Judge Robert P. Patterson, however, ruled that the allegations were sufficient to allow the case to proceed to trial. In particular, the federal judge ruled that, if proven, the plaintiffs' allegations would support a finding of "scienter" under the federal securities laws.

Based on the facts as alleged, a trier of fact could find Coopers' audit so reckless that Coopers should have had knowledge of the underlying fraud and acted in blind disregard that there was a strong likelihood that Happiness was engaged in the underlying fraud.

Proving this will be plaintiffs' burden at trial, but they have alleged facts sufficient to support a finding of scienter on the part of Coopers and so Coopers' motion to dismiss is denied.

After several years of legal wrangling, an outof court settlement was reached to resolve the class-action lawsuit stemming from the Happiness Express fraud. In January 2002, the parties to the lawsuit filed a legal notice describing the details of the proposed settlement with the federal district court in which the case would have been tried. The proposed settlement required Coopers & Lybrand to contribute $1.3 million to a settlement fund. Happiness Express's former stockholders would receive $715,000, or 55 percent, of the settlement fund, while the stockholders' attorneys would receive the remaining $585,000.

In the legal notice filed with the federal court, the plaintiff attorneys were required to state why they supported the settlement. The attorneys noted that a major problem they would have to surmount in pursuing the case was proving that Coopers & Lybrand had a motive to issue a false audit opinion on Happiness Express's financial statements. Additionally, the plaintiff attorneys admitted that they would have to overcome the contention by Coopers & Lybrand that the Happiness Express auditors had no actual knowledge of the falsifications in the company's accounting records and financial statements. Finally, even if the jury ultimately ruled in favor of Happiness Express's former stockholders, the plaintiff attorneys pointed out that the jury might decide that Coopers & Lybrand was responsible for only a small portion of the losses suffered by the stockholders.

As a result, the stockholders might receive only a nominal judgment from the accounting firm.The SEC settled the charges pending against Michael Goldberg by requiring him to pay a $150,000 civil fine and to forfeit the $310,000 of insider trading profits that he had earned while serving as Happiness Express's CFO . Goldberg also agreed not to violate federal securities laws in the future, although under the terms of the SEC settlement he neither admitted nor denied the charges that the SEC had filed against him. In February 2003, the SEC issued a litigation release that reported the settlement of the charges pending against Michael Goldberg's close friend who had received "material nonpublic information" from Goldberg regarding Happiness Express's deteriorating financial condition. Goldberg's friend was required to forfeit the $79,000 of trading profits he had earned by "shorting" Happiness Express's common stock and to pay a civil fine in the same amount. The SEC also announced that it had settled the insider trading claim filed previously against Goldberg's former landlord but did not reveal the nature of that settlement.

In 2003, Joseph Sutton pleaded guilty to conspiracy to commit bank fraud and securities fraud and was sentenced to 30 months in federal prison. His brother, Isaac, refused to plead guilty to similar charges pending against him and instead opted for a jury trial. On September 29, 2004, a New York jury found Isaac Sutton innocent of all the fraud charges filed against him by the SEC.

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