Case Study 7.8
Case Study 7.8 First Securities Company of Chicago (Ernst& Ernst v. Hochfelder et al.)
The critical issue is that Ernst & Ernst, who were First Securities auditors for more than two decades, failed to utilize appropriate auditing procedures which in consequence led to Ernst & Ernst failure to discover poor internal practices of the firm. Thereby, this prevented Ernst & Ernst from completing an effective and efficient audit of the brokerage firm, First Securities Company of Chicago. The discovery of the inappropriate procedures within the brokerage firm could have led to the uncovering of other fraudulent practices done by the firm; which could have been prevented and saved investors’ investments.
The key factors that gives evidence to this issue are as followed:
Critical Factor #1
Mr. Nay had opened up an escrow syndicate fund that was not an asset of First Securities but was handled by Mr. Nay. The “escrow syndicate” was only offered to his “nearest and dearest friends” who were widows with large amount of money left behind from their deceased husbands. In addition, he only offered this investment fund to retirees and those close to retiring. A widow of his close friend, Enrico Fermi testified that “Nay managed her family’s investments for many years but did not offer the opportunity to invest in the escrow syndicate until her husband’s death.” He betrayed and broke the trust of his investors and close friends.
This critical factor is relevant to an auditor’s character of professional skepticism, in which the auditor should never automatically or fully conclude that all things (financial statements, accounts, clients, etc.) are 100 percent accurate or truthful, and should be investigated thoroughly too its’ full extent.
Critical Factor #2
Leston Nay, the President of First Securities Company of Chicago, had deceived investors into participating into a fund called the escrow syndicate and continuously cheated them into thinking
The critical issue is that Ernst & Ernst, who were First Securities auditors for more than two decades, failed to utilize appropriate auditing procedures which in consequence led to Ernst & Ernst failure to discover poor internal practices of the firm. Thereby, this prevented Ernst & Ernst from completing an effective and efficient audit of the brokerage firm, First Securities Company of Chicago. The discovery of the inappropriate procedures within the brokerage firm could have led to the uncovering of other fraudulent practices done by the firm; which could have been prevented and saved investors’ investments.
The key factors that gives evidence to this issue are as followed:
Critical Factor #1
Mr. Nay had opened up an escrow syndicate fund that was not an asset of First Securities but was handled by Mr. Nay. The “escrow syndicate” was only offered to his “nearest and dearest friends” who were widows with large amount of money left behind from their deceased husbands. In addition, he only offered this investment fund to retirees and those close to retiring. A widow of his close friend, Enrico Fermi testified that “Nay managed her family’s investments for many years but did not offer the opportunity to invest in the escrow syndicate until her husband’s death.” He betrayed and broke the trust of his investors and close friends.
This critical factor is relevant to an auditor’s character of professional skepticism, in which the auditor should never automatically or fully conclude that all things (financial statements, accounts, clients, etc.) are 100 percent accurate or truthful, and should be investigated thoroughly too its’ full extent.
Critical Factor #2
Leston Nay, the President of First Securities Company of Chicago, had deceived investors into participating into a fund called the escrow syndicate and continuously cheated them into thinking