Merry-Go-Round (MGR), a clothing retailer located primarily in shopping malls, was founded in 1968. By the early 1990s, the company had gone public and had expended to approximately, 1500 stores, 150,000 employees and $1 billion in annual sales. The company’s locations in malls targeted the youth and teen market. The company was listed by Forbes magazine as one if the top 25 companies in the late 1980s. However, in the early 1990s, the company faced many challenges. One of its co-founders died, and the other left to pursue unrelated business interests. The company faced stiff competition from the other retailers (e.g. Gap and Banana Republic), fashion trends changed and mall traffic declined. Sales fell, and experts speculated that MGR failed to anticipate the key industry trends and lost sight of its customer market. To try to regain its strong position, the company acquired Chess King, Inc., a struggling chain of men’s clothing stores located in malls, in 1993.
The company’s sales continued to fall and, later in 1993, it brought back one of its co-founders to manager the company and wrote down a significant amount of inventory. However, this inventory write-down caused the company to violate loan covenants. Facing bankruptcy, the company, based on the evidence of its newly hired law firm Swidler and Berlin, hired turnoaround specialists from Ernst & Young (EY) to help overcome the financial crisis and develop a long-term business plan. However, the company’s decline continued, and it filled Chapter 10 reorganization in 1994. In 1996, the remaining assets were sold for pennies on the dollar.
Subsequently, a group of 9,000 creditors (including former employees and stockholders) began litigation against parties it deemed responsible for their losses. These parties included EY, which the creditor sued for $4 billion in punitive and compensatory damages (EY’s fees from MGR totalled $4.5 million).
The lawsuit alleged that EY’S incompetence was the main cause of MGR’s decline and demise. The lawsuit alleged in part that:
? The turnaround team did not act fast enough.
? The leader of the team took an eight-day vacation at a critical point during the engagement.
? The cost-cutting strategy called for only $11 million in annual savings, despite the fact that the company was projected to lose up to $200 million in 1994.
? While store closings were key to MGR’s survival, by 1995 only 230 of 1,434 stores had been closed and MGR still operated two stores in some malls.
? The turnaround team included inexperienced personnel – a retired consultant, a partner with little experience in USA and with retail firms, and two recent college graduates.
? EY charged exorbitant hourly rates and charged unreasonable expenses (e.g. charges included reimbursement for a dinner for three of the consultants totalling excess of $200).
? EY declined any wrongdoing, but in April 1999 agreed to pay $185 million to settle the injured parties.
? EY gad a close relationship with Rouse Co., one of MGR’s primary landlords (EY was soliciting business from Rouse and provided significant tax services).
? Swidler (the law firm that recommended EY to MGR) and EY had participated in at least 12 different business arrangements, some of which resulted in Swidler receiving significant fees from EY.
? EY did not disclose either of these relationships to MGR.
Required
a) Consider whether there should be specific professional standards for independent auditors who consult. Given that non-auditors who consult do not have formal professional standards to adhere to, describe the advantages and disadvantages that result from having such standards.
b) Do you think that EY acted unethically given it had these relationship?
c) How could these relationship have affected EY’s advice to MGR? In other words, refer to the charges above and speculate as to whether any of the charges against EY may have stemmed from the relationships described above.
 

Answers

a)

Auditors, like all practitioners, will conform with such laws throughout the conduct of their practice throughout addition to essential ethical rules which are mandatory and which place penalties on non-compliance, the same will be said of professional requirements which will occur and be taken into consideration in the exercise of the profession, and these norms should be advantageous for the profession. Anyone is specifically interested in a quality service that provide information on these requirements and principles, which will give them the possibility of reporting to the competent bodies or calling the attention of the auditors from which they receive the service on a kind of regularity which they find not to be compliant with the existing provisions.

These standards or norms must be based on:

1. Pre-evaluation of the company's situation and subsequent consultation with the customer and original consultation with the staff, thereby providing the auditor an understanding of the challenges the company is facing from the management and workers viewpoint.
2. Development of relevant procedures where the client can make recommendations to the auditors and even make suggestions to the client by the auditors.
3. Carry out the preparation of the audit in order to be transparent about which issues warrant further consideration.
4. Guarantee of a company in which it follows the standards.
5. Analysis of all economic factors without focusing on verbal knowledge, everything should be analyzed with ample cynicism to draw attention to any minor mistake and be subject to evaluation and review. "It's called trying to find out."
6. Agreements agreeing that the auditors do not have any kind of relationship with the staff of the company, the management or the expertise of the organization, that is, agreeing that there are no clear ties in the performance or failure with the future stakeholders. For an business. In this situation, having the necessary inquiries is always on the part of the company.
7. Maintain also impartial judgement.
8. Opportunity to conduct in-depth analysis of corporate processes, including financial and economic results.
9. Keep direct contact with the consumer to make reasonable decisions on the move.
10. Recurring evaluations with the goal that they can be detected very easily and corrected on time where there are mistakes or fraud threats.

Advantages of standards;

• We provide a certain degree of confidentiality to the company over the work to be carried out.
• It acts as an auditor's work program and converts into accountability.
• Needs daily customer service
• This is a means of making a pledge to reaching goals
• Continuous operation allows the customer to make the requisite changes before serious problems arise.

Disadvantages of standards;

• There is a protocol that must be practiced and adhered to, so this may be an annoyance for workers.
• The proposed improvements may be subject to opposition.

b)

Indeed, it violates an legal evaluation principle, Freedom. Such a intimate association with any person or business that is connected to the client would often be unethical, because it typically makes room for theft against the individual. Some of the risks to integrity during the audit includes the parallel procurement of lobbying services by the auditors, in which case the law firm has prior contractual ties with the audit firm, which could mean that the client 's decision to employ EY by the law firm, It may have been necessary to derive a financial advantage from this audit company, in addition to the fact that there may still be little ethical integrity on the part of lawyers, for example in the case of lawsuits filed by workers against EY, when there is a partnership between the two companies, each of them may seek to advantage the other, either in financial matters or in l.

c)

So far as the legal dimension is concerned, the close association with the law firm may have affected the concealment of essential legal details relating to the paying of ineffective legal procedures or other legal anomalies, the auditor may review incorporation records that are protocolized with the Lawyer. In the other side, the auditing company's costs were inflated, by which we may conclude that part of those costs will go to the law firm. This is important to remember that the auditor who verifies legal issues has the responsibility to determine how the laws governing the company require it to fulfill its goals in an fiscal, productive and effective fashion, as well as whether it is fair, reliable, revised and tailored to fact, and it should therefore be concluded that information about these consumer data might have been omitted.