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Health Management, Inc.

Presented By:
Nama Anggota Kelompok :
1.Mochamad Ridwan Pratama - NPM 1306498626
2.Ferri Ulung Satriya NPM 1306498361
3.Ferdinand Sirait NPM 1306498355
4.Lelo Habibi NPM 1206335205

Health Management, Inc

Clifford Hotte Had Problem ( Had come up


short of its ernings target)
Financial analyst projected $0.74
earning/share
Actual EPS $0.54
To achieved target :Bregman (CFO) To lower
COS, Increase Gross profit and net income
-- inflated $1.8 M year end inventory and
few smaller adjustment
Bregman supervised BDO Seidman 1989
and 1990 audit HMI

Health Management, Inc


Contd

Triggernya : 1995 Private Securities Litigation


Reform Act (PSRLA) , new federal law. Dimana
dengan PSRLA ini, semakin sulit untuk lawyer
untuk mendapatkan data-data besar yang
berhubungan dengan law suit.
The federal security law make it unlawful for
companies registered with SEC to issues FS that
misrepresent their Financial condition and
operating result.
The Accounting firm that issue unqualified opinion
later proven to contain material errors only be
guilty of accepting a client whose management is
inept and/or unethical.

Health Management, Inc


Contd

1991 Big Six campaign to persuade


congress to reform the federal law.
PSLRA contains several clause to
independent audit function, requires
audit firm to design audit to provide
reasonable assurance to detecting illegal
act and reporting to SEC any illegal act
by client.

Oh, by the way

The BDO Seidman audit team finally arrived at HMIs headquarters during
the latter part of June.

On that first day at the clients office, Tsai received a rude shock from her
old friend.

During a meeting with Tsai, Bergman informed her of the $1.8 million of intransit inventory at year-end.

Tsai, no doubt, was alarmed by that figure since it represented nearly


twenty percent of HMIs year-end inventory of $9.8 million and
approximately one-half of the year-end inventory of HMIs New York
warehouse.

Another unusual feature of the year-end inventory transfers was that they
had been transported in an HMI vehicle (ussually others company typically
used common carriers, such as United Parcel Service (UPS)).

Warren Fisk, who was scheduled to replace Bornstein as the HMI audit
partner in 1996, told Bergman that the in-transit inventory made him
uncomfortable.

Fisk informed Bergman that he and his colleagues were considering


various additional tests to verify the in-transit inventory and would likely
require HMI officials to sign a separate management representation letter
11/17/15
confirming that item.

Lists The Principal Audit


Procedures
1)

Requested the usual documentation that HMI pepared for all inventory
transfers.

2) Veriffied that the inventory transfer documents were signed by both the shipping
and receiving pharmacists, identified on the documents the pharmaceuticals
reportedly included in the transfers, confirmed that the quantities and per unit
prices of those pharmaceuticals agreed with the information previously provided to
the auditors by HMI management.
3)

Interviewed the truck driver who allegedly tansported the year-end inventory
transfers. Compared his chronology of the relevant events with the inventory
transfer documents and found no inconsistencies.

4) Examined the expense report filed by truck driver and found consistent with his
chronolgy of the relevant events and the chronology of those events provided by
other HMI personnel.
5) Discussed the inventory transfers with HMls controller who provided a credible
explanation for why the transfers were necessary.
11/17/15

Lists The Principal Audit


Procedures (Contd)
6)

Discussed the inventory transfers with HMIs CFO (Bergman) who indicated that
he had not been able to prevent the transfers because he had not learned of them
until after the fact.

7) Used various mathematical tests, including a gross profit percentage test to


challenge the reasonableness of the companys total year-end inventory, these tests
suggested that the year-end inventory was reasonable.
8) Obtained standard management representations letter and separate representation
letter from company officials focusing exclusively on the in-transit inventory; each of
these letters confirmed the existence of the in-transit inventory.

11/17/15

Other Issue in Audit


Engagement
1) Near the end of the audit, a dispute arose between HMI management and
the auditors regarding the adequacy of the allowance for doubtful
accounts for the companys more than $30 million of accounts receivable.
=> The auditors proposed an adjusting entry to increase the year-end
balance of the allowance account by $1.2 million.
Management insisted that an increase of only one-half of that amount
was necessary.
After considerable discussion with HMIs officers, Fed Bornstein
decided to accept the clients proposed adjustment of $600,000 for the
allowance account.

11/17/15

Other Issue in Audit


Engagement (Contd)
2) Another problem the HMI audit team faced during the 1995 engagement
was an earnings release issued by the company approximately one week
prior to the date that the fieldwork was begun.
=> A company that reports its earnings before the completion of the
annual audit exerts subtle but significant pressure on the auditors to
pass on proposed adjustments that would materially reduce the
prematurely released earnings figure.
If the auditors insist that a lower earnings figure be included in the
audited financial statements, the unpleasant earnings surprise may
cause a sharp drop in the clients stock price.

11/17/15

Result

BDO Seidman completed the 1995 HMI audit in late July.

Similar to the audit opinions issued by the firm in previous years on HMIs
financial statements, the 1995 audit opinion was unqualified.

11/17/15

After Released The Audit of


Financial Report

In December 1995, Drew Bergman was given a new title at HMI, Corporate
Development Officer.

Paul Jurewicz, an individual with considerable accounting experience in the


healthcare industry was hired to replace Bergman as HMIs CFO.

Shortly after he joined HMI, Jurewicz was having a casual conversation


with the companys controller, one of Bergman and Hottes coconspirators.
=> During that conversation, the controller matter-of-factly referred to
the inventory fraud, believing
Jurewicz was aware of it.

Jurewicz informed Clifford Hotte of the information he had accidentally


obtained from the controller.

=>

During that conversation, the controller matter-of-factly referred to


the inventory fraud, believing
Jurewicz was aware of it.

=>
Jurewicz then took matters into his own hands and informed the
companys legal counsel.

In February 1996, HMI issued a press release indicating that irregularities


had been discovered in the companys accounting records.

=>
That press release sent HMIs stock price spiraling
11/17/15 downward and
prompted BDO Seidman to withdraw its audit opinion on the companys

After Released The Audit of


Financial Report (Contd)

Next, a fluny of lawsuits and criminal indictments swamped HMI, its


corporate officers, and other parties associated with the 1995 financial
statements.

Hottes initial trial ended in a hung jury.

=>

Throughout that first trial, Hotte insisted that Bergman had been
responsible for the fraudulent inventory scheme.

But, in a second trial, a jury convicted Hotte of 14 counts of conspiracy


and securities fraud.

The former CEO was sentenced to nine years in federal prison, ordered to
pay a $250,000 fine and to make $9.6 million of restitution to the victims
of the Inventory hoax.

=>
Bergman was also dismissed from the lawsuit after
agreeing to testify
truthfully regarding the HMI inventory fraud and
other relevant events and circumstances during his tenure at HMI.

The class action securities lawsuit filed against BDO Seidman by more
than 4,000 HMI stockholders initially included several defendants, most of
whom were Hotte and Bergmans coconspirators.
11/17/15

After Released The Audit of


Financial Report (Contd)

The attorneys for HMIs stockholders claimed that the inventory fraud had
cost their clients approximately $37 million and that BDO Seidman was
responsible for 75 percent of those damages.

In October 1997, another healthcare firm acquired HMI for a nominal


amount.

11/17/15

Red Flags & Crooks

The skilled teams of attorneys retained by the plaintiffs and defendants in


the HMI lawsuit faced many challenges in representing their clients.

According to the trial transcripts, the two teams paid these expert
witnesses approximately $600,000 in total.

=>

That amount was four times larger than the approximately $140,000
BOO Seidman received for performing the 1995 HMI audit.

The principal objective of the plaintiff attorneys was to convince the jury
that the auditors, at a minimum, had recklessly ignored the auditing
professions technical standards during the 1995 audit and the plaintiff
attorneys repeatedly drew attention to the red flags the auditors had
allegedly overlooked or, at least slighted during the 1995 HMI audit.
=> These red flags included, among other items, the SECs inquiry
regarding HMIs allowance for doubtful accounts, the premature press
release reporting the cormpanys 1995 earnings, the allegations included
in the anonymous letter that BDO Seidman received before the beginning
of the 1995 audit, and the suspicious circurmstances surrounding the intransit inventory at year-end.

11/17/15

Red Flags & Crooks (Contd)

The team of defense attorneys led by Michael Young used a three-prong


strategy during the trial to help their client prevail.

1) attempted to portray the auditors as victims of the inventory fraud rather


than as reckless, if unwitting, accomplices of Bergman and Hotte.
2) defense counsel was to repeatedly thump the bible of the auditing
profession, that is, the professional auditing standards.
3) intended to blunt the repealed allegations of the plaintiff attorneys that
BDO Seidman had failed to properly investigate the $1.8 million of intransit inventory.

11/17/15

Question 1

1. BDO Seidmans attorneys pointed out


correctly that professional standards do
not prohibit auditors and client
personnel from being friends. At what
point do such relationships result in
violations of the auditor indepencene
rules and guidelines? Provide
hypothetical examples to strengthen
your answer

Answer

SA 100.4 :
Setiap Praktisi wajib mematuhi prinsip dasar etika profesi di bawah ini:
- Prinsip integritas
- Prinsip objektivitas.
- Prinsip kompetensi serta sikap kecermatan dan kehati-hatian
profesional (professional competence and due care).
- Prinsip kerahasiaan.
- Prinsip perilaku profesional.

SA 100.10
Kepatuhan pada prinsip dasar etika profesi dapat terancam oleh
berbagai situasi. Ancaman tersebut dapat diklasifikasikan sebagai
berikut:

Ancaman kepentingan pribadi, yaitu ancaman yang terjadi sebagai


akibat dari kepentingan keuangan4 maupun kepentingan lainnya
dari Praktisi maupun anggota keluarga langsung5 atau anggota
keluarga dekat6 dari Praktisi;

Question 2
According to court testimony on July 20, 1955,
Drew Bregman recommended to HMIs
board of directors that Mei-ya-Tsai be hired
as the companys chief of accounting. One
week later, BDO Seidman issued its audit
report on HMIs 1995 financial statements.
Under presently existing profesional
standards would this situation have
presented an indepence problem for BDO
seidman? Defend your answer

Answer

SA 100.4 :
Setiap Praktisi wajib mematuhi prinsip dasar etika profesi di bawah
ini:
- Prinsip integritas
- Prinsip objektivitas.
- Prinsip kompetensi serta sikap kecermatan dan kehati-hatian
profesional (professional competence and due care).
- Prinsip kerahasiaan.
- Prinsip perilaku profesional.

SA 100.10
Kepatuhan pada prinsip dasar etika profesi dapat terancam oleh
berbagai situasi. Ancaman tersebut dapat diklasifikasikan sebagai
berikut:

Ancaman kepentingan pribadi, yaitu ancaman yang terjadi sebagai


akibat dari kepentingan keuangan4 maupun kepentingan lainnya
dari Praktisi maupun anggota keluarga langsung5 atau anggota
keluarga dekat6 dari Praktisi;

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