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Forensic Accounting > Cardillo Travel Systems, Inc. > Flashcards

Cardillo Travel Systems, Inc. Flashcards

0
Q

Who was Raymond Riley?

A

Cardillo’s in-house attorney

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1
Q

Who was A. Walter Rognlien?

A

74 year old chairman of the board and CEO of Cardillo Travel

Systems, Inc.

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2
Q

Who was Russel Smith?

A

Cardillo’s controller

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3
Q

What was on the affidavit relating to the company’s transaction with United Airlines that top executives were trying to get Russell Smith, the controller to sign?

A

Nature of the transaction involving a $203,000 payment by United Airlines to Cardillo

And failed to disclose the purpose of the payment or what the
Funds were being used for

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4
Q

What statement did Russell Smith know to be incorrect on the affidavit?

2) Why was this significant?

A

Affidavit stated stockholders equity to exceed $3 million
(Russell knew this was a lie)

2) Cardillo at the time was involved in a lawsuit where the court issued an injunction to maintain stockholders’ equity at over $3 million

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5
Q

2 reasons Russell Smith, refused to sign the affidavit on May of 1985?

A

1 blatant misrepresentation concerning the company’s
Stockholders’ equity

2 sense of uneasiness regarding United Airline’s payment to Cardillo
(May 1985)

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6
Q

Who was Esther Lawrence?

A

Firm’s 44 year old president and chief operating officer (COO)
Also Walter Rognlien’s wife and confidante

She assumed control of the company’s day to day operations
In 1984

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7
Q

Who was present (3) to try to get the controller to sign the affidavit?

A

A. Walter Rognlien
Raymond Riley
Esther Lawrence

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8
Q

Company History

A

Founded in 1935, Purchased by Rognlien in 1956

Cardillo Ranked as the 4th largest company in the travel agency
Industry and was the first to be listed on the national stock
Industry

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9
Q

Financial history of Cardillo since acquired by Rognlien?

A

Cardillo’s annual revenue had steadily increased since Rognlien
Acquired the company, revenue increased to $100 million by 1984

Company started experiencing serious financial problems in
1982

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10
Q

Why did Cardillo post collective losses of $1.5 million between 1982 and 1984?

A

Due to An aggressive Franchising strategy implemented by Rognlien
Company posted $1.5 million in losses between 1982 and 1984 from dramatic increase in operating expenses

In 1984 alone, the strategy doubled number of travel agency franchises
Operated by Cardillo

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11
Q

What did Rognlien in May 1985 explain to the controller, Russell, about the $203,000 payment from United Airlines?

A

Payment was intended to cover expenses incurred by Cardillo in changing from American Airlines’ Sabre computer reservation system to United Airlines’ Appollo system

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12
Q

What did Rognlien want Smith to do about the $203,000 payment from United Airlines to Cardillo?

2) Why did Smith refuse?

A

Record the payment immediately as revenue, so the company would meet the $3 million minimum stockholders’ equity threshold
Established by court order

Smith refused because it was improper recognition of revenue since the payment of $203,000 was refundable to United airlines if it wasn’t spent

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13
Q

What did Rognlien do when Smith refused?

A

Fired him

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14
Q

Who was Helen Shepherd?

A

The audit partner supervising the 1985 audit of Cardillo by Touche Rosse, who saw a red flag with recognizing the $203,000 payment as a commission in November of 1985

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15
Q

When and what did Cardillo record the adjustment entry for the payment of United Airlines?

A

Adjustment entry recorded in Late June of 1985

Dr Receivables - United Airlines. 203,210
Cr Travel Commisions and Fees. 203,210

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16
Q

Shepherd’s subordinates had discovered the adjusting entry during their…

A

Second- quarter review of Cardillo’s Form 10-Q statement

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17
Q

When Lawrence was asked about the adjustment entry what did she tell the auditors?

2) How did the auditors respond?

A

Lawrence told the auditors that the adjustment entry involved commissions earned by Cardillo from United Airlines during the 2nd quarter

2) the auditors accepted Lawrence’s explanation without corroborating with other audit evidence

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18
Q

What did Rognlien and Lawrence insists to Helen Shepherd, the supervising audit partner at Touche and Ross?

What did Helen Shepherd believe about the $203,000 entry?

A

The $203,000 amount was properly recorded as Commision revenue and was not refundable to United Airlines under any circumstances

2) Helen believed the entry should not be recognized immediately as revenue based on a review of the client files pertaining to the agreement because there were circumstances where the amount was refundable to United Airlines

19
Q

What did Rognlien eventually agree to allow Shepherd to do?

A

Request a confirmation from United airlines

20
Q

When did Shepherd receive the requested confirmation from United Airlines?

A

December 17th 1986

21
Q

What did the confirmation from United Airlines to the auditor state?

A

The disputed amount was refundable through 1990 if certain
Stipulations of the contractual agreement between the 2 parties
Weren’t fulfilled

22
Q

What was Shepherd never aware of about the $203,000 payment?

A

The payment was intended to reimburse Cardillo for expenses

Incurred in switching to United Airlines reservation system

23
Q

After Shepherd received the confirmation, how did Rognlien explain the difference of opinion between United Airlines and Cardillo about the terms of the agreement?

A

Rognlien told Shepherd he had a secret arrangement with the chairman of the board of United Airlines

According to this confidential business agreement the $203,210 would never have to be repaid

24
Q

What did Rognlien do when Shepherd asked to contact United’s chairman of the board to confirm the confidential business arrangement?

A

Rognlien refused, because there really was no existing arrangement

25
Q

Who was William Kaye?

A

Cardillo’s Vice President of finance

26
Q

What did Shepherd advice, William Kaye, the Vice President of finance?

How did William Kaye respond?

A

That the $203,000 amount could not be recognized as revenue
Until the contractual agreement with United Airlines expired in 1990

2) Kaye refused to make appropriate adjustment entry, due to Lawrence’s insistence

27
Q

What happened on February 1986?

A

In February 1986, Cardillo indicated they terminated their relationship with Touche Ross filing an 8-K with the SEC

28
Q

What was indicated in the 8-K signed by Lawrence?

A

The 8-K signed by Lawrence indicated no existence in disagreements that led Cardillo to dismiss Touche Ross

29
Q

What was indicated in the letter filed by Touche Ross that had to be filed as an exhibit of the 8-k?

A

In the letter, Shepherd discussed the dispute involving the United Airlines payment to Cardillo

Shepherd disclosed that improper accounting treatment given to that transaction resulted in misrepresented financial statements of Cardillo in 1985

30
Q

How did Raymond Riley, Cardillo’s legal counsel respond to Shepherd’s exhibit letter?

A

He wrote that she had misrepresented the United Airlines Cardillo transaction in the Touche Ross exhibit letter filed with the 8-k

Riley also informed Shepherd Cardillo would not pay the $17,500 invoice that Touche Ross had submitted for professional services rendered before being dismissed

31
Q

What happened on January 21, 1986?

A

Cardillo retained KMG Main Hurdman (KMG) to replace Touche

Ross as their independent audit firm

32
Q

What did Rognlien do when KMG personnel asked about the accounting treatment Cardillo applied to the United Airlines payment?

How did KMG react?

A

Rognlien informed KMG he had a secret arrangement with United Airlines that superseded the written contractual agreement

2) KMG refused to accept this explanation

33
Q

Who was Roger Shlonsky?

A

KMG audit partner responsible for the Cardillo engagement

34
Q

How did Roger Shlonsky tell Rognlien the payment should be recognized?

A

On a pro rata basis over a 5 year period of written contractual agreement with United Airlines

35
Q

Cardillo executives also successfully concealed from KMG auditors that…

A

The United Airlines payment was simply an advance payment to cover installation expenses for the new reservation system

36
Q

In early 1986, Cardillo began to experience…

A

Severe liquidity problems

37
Q

What worsened Cardillo’s Liquidity problems in the middle of 1986?

A

Judge imposed a $685,000 judgement on Cardillo to resolve a civil suit filed against the company

38
Q

Following the judge’s ruling, Cardillo’s legal council informed Rognlien and Lawrence in a memo that the…

A

adverse judgement qualified as a “material event” and thus had to be reported to the SEC in form 8-K filing

39
Q

What happened 10 days after receiving Riley’s memo?

A

Rognlien sold 100,000 shares of Cardillo stock in open market

The proceeds were used to keep the company running

40
Q

What happened 24 days after receiving the memo from Riley?

A

Lawrence issued a press release disclosing the adverse legal settlement but failing to disclose an amount for the settlement

Also the press release understated Cardillo’s expected loss for 1985 by 300%

41
Q

What did KMG do after reviewing Cardillo’s press release?

A

Resigned as Cardillo’s independent audit firm

42
Q

What happened in May of 1987?

A

Creditors of Cardillo Travel Systems, Inc. forced the company into
Involuntary bankruptcy proceedings

SEC found Rognlien, Lawrence and Kaye had violated several
Provisions of federal securities laws

43
Q

How did Rognlien, Lawrence and Kaye violate several

Provisions of federal securities laws?

A

1 false representations to outside auditors
2 failing to maintain accurate financial records
3 failing to file prompt financial reports with SEC

44
Q

What did the SEC charge Rognlien with?

A

Violating insider trading provisions of federal securities laws

45
Q

The SEC imposed…

What happened in 1989?

A

Permanent injunctions of Rognlien, Lawrence and Kaye prohibiting them from engaging in future violations from securities laws

In 1989, Rognlien agreed to pay the SEC $60,000

Forensic Accounting (10 decks)

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