Fred Stern & Company, Inc.
Fred Stern & Company, Inc.
(Ultramares Corporation v. Touche et al.)
Fred Stern & Company, Inc. was a rubber importer based out of New York City during the 1920s. This capital-intensive business was in high demand for numerous industries at the time. As such, Fred Stern & Co. relied heavily on lenders to finance its daily operations. In 1924, Fred Stern & Co. approached a finance company named Ultramares Corporation for a loan of $100,000. Before accepting the terms, Ultramares Corp. requested an audited balance sheet to serve as support for the loan. A well-respected accounting firm named Touche, Niven & Co. had provided assurance for their statement a few months earlier, which allowed the deal to go through. The following year, in January 1925, Fred Stern & Co. filed for bankruptcy and Ultramares Corporation found itself suing Touche, Niven & Co. for fraud & negligence to recover $165,000 lost in the agreement.
When reviewing the case thoroughly, there are various red flags, overlooked by Touche Niven that should have been clear indicators of fraudulent reporting by Fred Stern Co. Firstly, when commencing the audit in February, Touches’ auditor Siess had to complete the general ledger & trial balance himself. It had not been posted since the prior April. This resulted in him reviewing some of his own work. Following this event, Stern’s accountant booked an additional entry debiting receivables and crediting sales in the amount of $700,000, more than doubling the accounts receivables account. As an explanation, he claimed that the entry represented December sales omitted from the accounting records.
Additionally, while auditing inventory, Touches’ auditor discovered several errors, which caused the inventory record to be overstated by more than $300,000, an overstatement of 90%. Also, while auditing payables, more errors appeared and the auditor discovered that the company had improperly pledged the same assets as collateral for several bank
(Ultramares Corporation v. Touche et al.)
Fred Stern & Company, Inc. was a rubber importer based out of New York City during the 1920s. This capital-intensive business was in high demand for numerous industries at the time. As such, Fred Stern & Co. relied heavily on lenders to finance its daily operations. In 1924, Fred Stern & Co. approached a finance company named Ultramares Corporation for a loan of $100,000. Before accepting the terms, Ultramares Corp. requested an audited balance sheet to serve as support for the loan. A well-respected accounting firm named Touche, Niven & Co. had provided assurance for their statement a few months earlier, which allowed the deal to go through. The following year, in January 1925, Fred Stern & Co. filed for bankruptcy and Ultramares Corporation found itself suing Touche, Niven & Co. for fraud & negligence to recover $165,000 lost in the agreement.
When reviewing the case thoroughly, there are various red flags, overlooked by Touche Niven that should have been clear indicators of fraudulent reporting by Fred Stern Co. Firstly, when commencing the audit in February, Touches’ auditor Siess had to complete the general ledger & trial balance himself. It had not been posted since the prior April. This resulted in him reviewing some of his own work. Following this event, Stern’s accountant booked an additional entry debiting receivables and crediting sales in the amount of $700,000, more than doubling the accounts receivables account. As an explanation, he claimed that the entry represented December sales omitted from the accounting records.
Additionally, while auditing inventory, Touches’ auditor discovered several errors, which caused the inventory record to be overstated by more than $300,000, an overstatement of 90%. Also, while auditing payables, more errors appeared and the auditor discovered that the company had improperly pledged the same assets as collateral for several bank