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 even before HMI. He has been assigned to various engagements and one of those is the Health Management, Inc. itself. With this, Bergman is already knowledgeable about the audit procedures of the firm and he knows the people working in there. One of these is the audit manager of their engagement, Mei-ya Tsai. It is said that the two have established close relationship that might be a source of uncertainty and question the audit engagement they are in.

Upon audit, Bergman decided to confide the inventory fraud they committed to Tsai and her associates. But it is not only in the inventory that problem aroused for the company. It was also found out that there was a great discrepancy in their allowance for doubtful accounts amount. After audit, BDO Seidman received a letter regarding the HMI and it also questioned the independence of the firm. The problem complicates when HMI changed its CFO to Paul Jurewicz. Jurewicz accidentally attained information regarding the inventory fraud committed by the Hotte and his co-conspirators. He informed the legal counsel and the board and action was taken from then on. Charges and cases were filed against Hotte and Bergman. BDO Seidman also received class-action securities lawsuits from the victims of the fraud.

In the end, it was BDO Seidman who underwent trial and defended itself from all allegations made. With the help of their defense attorney, headed by Michael Young, BDO Seidman obtained a favorable decision from the jury.

One of the questions raised during the trial of BDO Seidman is the need rather to show the audit working papers of inconclusive audit test. I believe that it is not really relevant to show the working papers especially if it does not show significant results or effects to the audit. It would just create a burden on the part of the auditor since it is up to his professional judgment already if such information is useful or not to his audit.

Another issue in the case is about inventory rollback. I believe that it is necessary to have this procedure because it can really check the existence and completeness of one's inventory, however