Campbell Soup Case Essay

SynopsisThe Campbell Soup companionship has dominated the soup assiduity since the confederacy developed a follow-effective method of producing condensed soup products in 1899. Throughout virtually of the twentieth century, Campbell was known as sensation of the about conservative companies in the United States. In 1980, Campbell startled the backing human macrocosms by selling debt securities for the first measure and by embarking on a program to lengthen and diversify its historically short product line. nonwithstanding a sizable increase in revenues, the diversification program failed to change Campbells profitability, which prompted the comp alls executives to refocus their attention on their sum of money clientele, namely, manufacturing and tradeing soup products. Unfortunately, by the dying of the twentieth century, the publics interest in soup was waning.Faced with a shrinking market for its primary product, Campbells precaution team producedly began appl y a series of questionable business practices and method of story gimmicks to prop up the companionships makeuped profits. A class-action compositors case filed in early 2000 by disgruntled Campbell line of productsholders aerated top federation executives with misrepresenting Campbells operating results in the unexampled-fangled 1990s. The principal allegation was that the executives had apply a variety of methods to embroider the companys revenues, gross margins, and profits during that time frame. Eventually, PricewaterhouseCoopers (PwC), Campbells self-directed take stock firm, was named as a co-defendant in the case.The plaintiffs in the class-action causal agency claimed that PwC had headyly scrutiniseed Campbell, which effectively allowed Campbells executives to continue their outlaw(a) schemes. This case examines the allegations filed against PwC by Campbells stockholders with the primary purpose of illustrating the take stock objectives and procedures that can and should be apply to a clients revenue and revenue-related accounts. The case also provides students with in-chief(postnominal) insights on how the PrivateSecurities Litigation ameliorate im express of 1995 has affect attendants gracious liability in lawsuits filed down the stairs the Securities and Exchange work of 1934.Campbell Soup CompanyKey Facts1.During much of its history, Campbell Soup was known as one of the most conservative king-sized companies in the U.S. economy.2. Campbells conservative somatic market-gardening abruptly changed in the 1980s when the company sold debt securities for the first time and embarked on an ambitious program to diversify and expand its product line.3.In the late 1990s, after the diversification program had produced disappointing financial results and when market data portendd that the publics interest in soup was waning, Campbell executives allegedly began using several illicit methods to meet Wall Streets gain targets fo r the company.4.A class-action lawsuit filed in 2000 charged that Campbell had offered customers large, period-ending discounts to artificially inflate gross gross revenue, accounted improperly for those discounts, put down bogus gross revenue, and failed to record appropriate re actions for anticipated sales returns.5.PwC, Campbells audit firm, was named as a defendant in the class-action lawsuit and was charged with recklessly auditing Campbells financial statements.6.Because the class-action lawsuit was filed under the Securities Exchange Act of 1934, the national judge presiding over the case had to decide whether the allegations involving PwC satisfied the brisk pleading standard established by the Private Securities Litigation Reform Act of 1995.7.The PSLRAs pleading standard requires plaintiffs to plead or allege factssuggesting that there is a strong inference of scienter on the pull up stakes of a effrontery defendant.8.To satisfy the PSLRA pleading standard in the deuce-ace Circuit of the U.S. District Court in which the Campbell lawsuit was filed, a plaintiff, at a minimum, must allege that the given defendant acted with foolhardiness.9. by and by reviewing PwCs audit workpapers, the federal judge ruled that the plaintiffs had failed to satisfy the PSLRA pleading standard, which resulted in PwC being dismissed as a defendant in the case.10.In February 2003, Campbell settled the class-action lawsuit by agreeing to pay the plaintiffs $35 million, although company executives denied any wrongdoing.Instructional Objectives1.To build that even the largest and highest profile audit clients can pose significant audit risks.2.To localise discretionary business practices and write up gimmicks that can be used to distort a companys report operating results.3.To identify audit procedures that should be applied to a clients sales and sales-related accounts.4.To examine the implications that the Private Securities Litigation Reform Act of 1995 has fo r the civil liability of independent auditors in lawsuits filed under the Securities Exchange Act of 1934.5.To examine the concepts of recklessness and negligence in the context of auditors civil liability.Suggestions for UseThe high-risk accounts that atomic number 18 the focus of this case are sales and sales-related accounts. This case focuses students attention on schemes that companies can use to enhance their reported operating results. These schemes involve twain discretionary business practices and chronicle gimmicks. Auditing textbooks generally ignore the fact that audit clients often manage or manipulate their reported profits by using discretionary business practices such(prenominal) as delaying advertising or maintenance expenditures. This case requires students to address this possibility and consider the resulting audit implications. After treating this case, I hope my students realise that companies that use discretionary business practices to sic their profi ts are possible inclined to use accounting gimmicks for the very(prenominal) purpose.As an out-of-class assignment, you might ask students to break in the business press recent examples of companies that relieve oneself assay to manage their earnings without violating any accounting or financial reporting rules. Have students present these examples and then discuss them when addressing case question No. 1. I think you allow find that students fool very different opinions on whether it is estimable for public companies to knead their income statement data while complying with the technical requirements of GAAP. You might consider promotional material this case with the health Management, Inc., case (Case 1.4). The Health Management case provides a general discussion of the PSLRA. The Campbell Soup case contributes to students understanding of the PSLRA by examining in more depth the pleading standard established by that federal statute and the impact that standard has on l awsuits filed against auditors under the Securities Exchange Act of 1934.Suggested Solutions to Case Questions1.hither are a few examples of discretionary business practices that unified executives can use to influence their companys revenues and/or expenses.Deferring advertising, maintenance, or separate discretionary expenditures until the following period.Slowing down (or accelerating) work on bulky-term construction projects or contracts for which the percentage-of-completion accounting method is used to recognize revenue.Using economic incentives to stimulate sales near the end of an accounting period (a technique used by Campbell).Are the practices just listed ethical? Typically, students suggest that since these practices do non violate any laws, GAAP, or different black and white rules, the practices cannot be considered unethicala roundabout carriage of arguing that they are ethical. That general point-of-view seems consistent with the following comment that prove Ir enas made regarding Campbells period-ending trade loading There is nothing inherently improper in pressing for sales to be made anterior than in the normal course . . . there may be any number of legitimate reasons for attempting to achieve sales earlier.For what it is worth, I believe that integrated executives who defer needed maintenance expenses or who postpone advertising programs that would likely produce sizable sales in future periods are not acting in the best interests of their stockholders. In other words, I do not believe such practices are proper or ethical. Likewise, corporate executives who take advantage of the inherent flexibility of the percentage-of-completion accounting method, ostensibly to serve their own economic interests, are not individuals who I would want service of process as stewards of my investments.In my view, it is a little more difficult to condition the trade loading practices of Campbell as unethical. Why? Because, allegedly, the companys com petitors were using the same practice. If Campbell chose not to offer large, period-ending discounts to their customers, the company would likely pass doomed sales to its competitors. Note Campbells CEO who resigned in 2000 announced in mid-1999 that his company was discontinuing trade loading.2. I would suggest that companies that use various legitimate business practices to manage their earnings are more prone to use illicit methods (accounting gimmicks, etc.) for the same purpose. As a result, auditors could reasonably consider such business practices as a red flag that mandates more extensive and/or rigorous audit experiments. Note Professional auditing standards suggest that corporate executives who place luxuriant emphasis on achieving earnings forecasts may be prone to misrepresentingtheir companys financial statement data.3.SAS No. 106, Audit Evidence, identifies three categories of charge assertions implicit in an entitys financial statements that independent auditors sh ould attempt to underpin by collecting sufficient appropriate audit evidence. The third of these categories is presentation and disclosure. Included in the latter category is the following item classification and understandability. Financial information is appropriately presented and described and disclosures are clearly expressed. AU 326.15 Likewise, one of the five transaction-related assertions is entitled Classification. This latter assertion suggests that, Transactions and events have been preserve in the proper accounts.Here are examples of spin techniques that can be used to enhance income statement data without changing net incomeClassifying cost of goods sold components as SG&A expenses to inflate gross profit on sales.Reporting items that qualify as operating expenses/ losses as nonoperating expenses/losses to inflate operating income. (One of the most common variations of this trick in recent years has been including legitimate operating expenses in restructuring loss es.)Treating other losses as extraordinary losses to inflate income from continuing operations.4.Shipping to the chiliad Year-end sales cutoff tests are intended to identify misclassification of sales occurring near the end of a clients fiscal year. Auditors bequeath typically submit a small sample of sales that the client recorded in the final few days of the fiscal year and a comparable with(predicate) sample of sales that occurred in the first few days of the unexampled fiscal year. Then, the relevant transit and other accounting documents for those sales will be inspected to acquire that they were recorded in the proper period. This standard test might have revealed the fact that Campbell was booking almost remarkably large sales near the end of accounting periods.Even though the shipping documents for these sales might have suggested that they were valid period-ending sales, a curious auditor might haveinvestigated the sales further. For example, that auditor might have attempted to determine whether the resulting receivables were collected on a timely basis. During the course of such an investigation, the auditor would likely have discovered that the sales were reversed in the following period or dealt with in some other nonstandard way.Accounts receivable confirmation procedures might also have resulted in the denudation of these sales. Customers to whom such sales were charged would likely have identified them as differences or discrepancies on returned confirmations. Subsequent investigation of these items by the auditors may have revealed their full-strength nature. As pointed out by the plaintiffs in this case, during physical line of descent counting procedures auditors typically take notice of any inventory that has been separate and not countedfor example, inventory that is sitting in parked trucks. If there is an unmistakably large amount of such segregated inventorywhich was apparently true in this case, the auditors should have in quired of the client and obtained a reasonable explanation. The old, reliable scan year-end transactions to identify large and/or unusual transactions might also have led to the discovery of Campbells sales shipped to the yard.Guaranteed sales During the first few weeks of a clients new fiscal year, auditors should review the clients sales returns and allowances account to determine whether there are any unusual trends apparent in that account. Auditors should be particularly cognizant of unusually high sales returns and allowances, which may planetary house that a client overstated reported sales for the prior accounting period. Accounts receivable confirmation procedures may also result in auditors discovering an unusually high rate of charge-backs by the clients customers.In some cases, clients will have written contracts that document the key features of sales contracts. Reviewing such contracts may result in the discovery of guaranteed sales or kindred transactions. Finally, simply discussing a clients sales policies and procedures with client violence may result in those personnel intentionally or unwittingly tipping off auditors regarding questionable accounting practices for sales, such as shipping to the yard or guaranteed sales.5. Here are definitions of negligence and recklessness that I have referred to in suggested solutions for questions in other cases. These definitions were taken from the following source D.M. Guy, C.W. Alderman, and A.J. Winters, Auditing, twenty percent Edition (San Diego Dryden, 1999), 85-86.Negligence The failure of the CPA to perform or report on an engagement with the receivable professional care and competence of a prudent auditor. Recklessness A serious occurrence of negligence tantamount(predicate) to a flagrant or reckless departure from the standard of due care.After reviewing the definition of negligence, ask your students to define or describe a prudent auditor. Then, ask them whether they believe that defi nition/description applies to the PwC auditors assigned to the 1998 Campbell audit.Here are two hypothetical examples drawn from this case involving what I would restrict as reckless auditors.A client employee tells PwC auditors that many year-end sales are guaranteed and that no reserve has been established for the large amount of returns that will likely be produced by those sales. PwC decides not to investigate this allegation because of custody constraints on the engagement.While reviewing receivables confirmations returned by Campbell customers, PwC auditors discover that approximately one-fourth of those customers indicate that their balances include charges for large amounts of product purchased near the end of the year, product that they did not order or receive. PwC dismisses this unusually large number of similar reported differences as a coincidence.6.Here is a list of key parties that have been affected by the PSLRA.Investors who suffer large losses that they believe we re caused by reckless or fraudulent conduct on the part of a given companys management team, its auditors, or other parties associated with the companys financial statements. At least some of these investors have likely found it moredifficult and costly to recover their losses because of the barrier to securities lawsuits erected by the PSLRA. Note Granted, the PSLRA has little impact on the ability of investors to recover losses in those cases involving obvious gross fraud or malfeasance by corporate management or other parties.Some parties have argued that the PSLRA diminishes the overall efficiency of the stock market. These parties argue that by making it more difficult for investors to file lawsuits under the 1934 Securities Act, the PSLRA has resulted in a larger portion of scarce investment bully being squandered by irresponsible corporate executives, which, in the long run, diminishes the strength of our economy and our nations standard of living.Generally, corporate execut ives have benefited from the PSLRA since it has reduced, to some degree, their exposure to civil liability.As pointed out in the Health Management, Inc., case (Case 1.4), the PSLRA apparently has not been very beneficial to large accounting firms. For whatever reason, in recent years, there has been a general upward trend in federal securities cases alleging accounting irregularities. Not only are independent auditors more likely to be named as defendants in such cases, the settlements in those cases tend to be considerably higher than in other lawsuits filed under the federal securities laws.