Health Management, Inc.
Health Management, Inc. (HMI) is a pharmaceutical distributor founded by Clifford Hotte. In year 1995, the projected earnings per share of $0.54, of the company fall short of their expected earnings of $0.74. With this, Hotte decided to deceive their shareholders and asked their Chief Finance Officer (CFO), Drew Bergman, to manipulate their financial statement. They manipulated the information with regards to the ending inventory, and overstating it thereafter. The problem now arises on how they will have to cover up the fraud to their audit firm, BDO Seidman’s Long Island. BDO Seidman’s Long Island has long been the auditor of the company since it started. The company’s CFO, Drew Bergman, is originally associated with the audit firm
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In the HMI case, there is already a great significance in the inventory of the company. First, the inventory in transit comprises 20 % of the ending inventory and almost half of the inventory of one of its warehouses. Second, it is the company's truck that delivered the goods which is in fact not the usual case. These figures itself already imposes a doubt if you are an auditor thus I believe that it was necessary to have an inventory rollback done during the audit.
One issue pointed out in the HMI case is the independence of the auditors. In the professional standards, what it emphasized is the independence of the auditor in mind and appearance when doing audit. I believe that there is nothing wrong with being friends or acquaintance with the people in the company you are auditing as long as it does not cloud your decisions and judgment as auditors. If your decisions are affected by such relationship, then, it can be concluded that you have no independence. For instance, you are the auditor of the company of your friend and your friend has been helpful to you especially with regards to the financial aspect. Upon audit, you are in a state that that relationship should be set aside first. If you discovered fraud in the company but you don't want to reprimand the company due to the gratitude that you have for your friend, then independence is destroyed.
Another problem about independence that BDO Seidman underwent is with regards to one of