The Leslie Fay Companies
February 10, 2014
1. After reviewing Leslie Fay’s financial statements, BDO Seidman should have taken a particular interest in several of the company’s financial statement items and associated ratios. Specific items of interest likely would have included net sales and other income statement accounts with large increases over the five-year period. Net sales displayed a dramatic 44 percent increase over the five-year period, even as Leslie Fay’s industry competitors were experiencing a declining sales trend during the late 1980’s and early 1990’s. In addition to the industry’s struggles, these changes should have been of significant interest to the auditors given Donald Kenia’s tendency to “pre-record” orders from customers. Other income statement account balances that derive from net sales and should have been of interest include gross profit (41% increase), operating income (47% increase), and net income (49% increase).
BDO should also have been interested in some of Leslie Fay’s balance sheet accounts, specifically accounts receivable (43% increase) and inventory (53% increase). In general, accounts receivable should be of significant interest to auditors given its nature of assisting in the hiding of fraud, usually through the creation of fictitious sales. In this situation, the company failed to report the write-off of uncollectible receivables and ignored discounts on outstanding receivables for large customers who were struggling to sell Leslie Fay’s products. With regards to the inventory account, Leslie Fay had been known within the industry to be behind the times with the latest fashion. Because of this, it would be reasonable to expect the company to report significant write-offs of inventory for items they were not able to sell, however, the inventory account actually increased over the examined time period. Accounts payable is another account that should have peaked BDO’s interest, due to the possibility that the...