The Leslie Fay Companies was a clothing manufacturer based in New York City. The company went public in 1946 and became known for its ladies’ dresses. In the early 1990s, the company faced financial difficulties and was forced to restate its earnings. In 2005, the company filed for bankruptcy.
The company’s problems began with an accounting scandal. In 1992, the company’s auditors uncovered evidence of fraud. The company had overstated its income by millions of dollars. The fraud was perpetrated by top executives, who used false invoices to inflate the company’s revenue.
The scandal led to an investigation by the Securities and Exchange Commission (SEC). The SEC found that the company had engaged in widespread accounting fraud. As a result of the scandal, the company was forced to restate its earnings for the years 1989 to 1991.
The company’s financial problems continued into the early 2000s. In 2004, the company announced that it would miss a bond interest payment. This led to a default on its debt. In 2005, the company filed for bankruptcy. It emerged from bankruptcy in 2006 and was sold to a private equity firm in 2007.
My inquiry in the Leslie Fay Companies case focuses on Paul Polishan’s actions and the influence they would have on the auditing procedure, given his self-created tyranny over financial information of the Leslie Fay Companies. Paul Polishan, a recent accounting graduate, was recruited by the Leslie Fay Companies straight out of college. The Leslie Fay Companies made women’s clothing, particularly focusing on dresses for middle-aged women and
After being promoted to Assistant Controller in 1974 and then to Treasurer in 1976, Polishan became the de facto head of the accounting department when the Controller retired in 1978. From 1978 until his arrest in 1992, Polishan had complete control over the financial information of the Leslie Fay Companies.
In May of 1992, concerns about possible fraud at the Leslie Fay Companies were first raised when an employee found some irregularities in the company ‘s books. An investigation was launched and it was discovered that Paul Polishan had been cooking the books for years, inflating sales figures and understating expenses. This created a false picture of profitability and growth at the Leslie Fay Companies, leading to over $ 100 million in fraudulent accounting entries. Polishan was arrested and ultimately sentenced to eight years in prison.
The actions of Paul Polishan had a profound effect on the Leslie Fay Companies and its auditors. Prior to his arrest, the company had been audited by Coopers & Lybrand for over 20 years. However, in the wake of the scandal, Coopers & Lybrand resigned as the auditor of the Leslie Fay Companies. In addition, the Securities and Exchange Commission (SEC) launched an investigation into the accounting practices of the company. As a result of these investigations, several top executives at the Leslie Fay Companies were forced to resign and the company was placed on probation for three years.
What effect do you think Paul Polishan ‘s self-established tyranny over the financial information of the Leslie Fay Companies had on the auditing process? Do you think that his actions would have been discovered sooner if there had been more internal controls in place? Or do you think that, regardless of internal controls, Polishan ‘s fraud would have eventually been uncovered? Explain your answer.
The Leslie Fay Companies was founded by Fred Pomerantz following World War II, when he established a company in New York City and went public in 1952. The son of Paul Pomerantz, John Pomerantz was named president of the Leslie Fay Companies in 1972.
The company grew rapidly during the late 1970s and early 1980s, becoming a publicly traded company in 1986. By 1987, Leslie Fay was the seventh largest manufacturer of women’s apparel in the United States. However, by 1992 the company was in financial distress due to heavy debt from leveraged buyouts and competition from less expensive imports. In February 1993, John Pomerantz resigned as chairman and CEO amid an SEC investigation into the company’s accounting practices.
In May 2005, after years of decline, The Leslie Fay Companies emerged from Chapter 11 bankruptcy protection. The Company has since been sold and is now a privately held entity.
Despite its challenges, The Leslie Fay Companies remains an iconic American brand name in the fashion industry.
The Leslie Fay Companies is best known for its high-quality, stylish women’s clothing. The company designs, manufactures, and markets a wide variety of products under its own brand names as well as licensed brands. Leslie Fay’s products are sold through all major channels of distribution, including department stores, specialty stores, and mass merchandisers.
In 1982, John Pomerantz replaced Paul Polishan as Chief Executive Officer and Chairman of the Board of Directors at the Leslie Fay Companies. Paul Polishan was in charge of all financial data for the Leslie Fay Companies.
From the moment the books were closed until they were reopened, Paul had control. His position gave him the authority to make sure that no one could get into the books without his knowledge. This made it very difficult for anyone to commit fraud without Paul being aware of it.
The Leslie Fay Companies went public in 1986 and everything changed. The Company was now required to have its financial statements audited by an independent accounting firm. The outside auditors would come in and audit the Company’s financial statements on a yearly basis.
The independence of the auditors was important because they would be able to provide an objective opinion on whether or not the financial statements fairly represented the financial position of the Company.
In 1987, KPMG LLP was hired as the independent auditor for the Leslie Fay Companies. KPMG audited the Company’s financial statements for the fiscal years ended January 31, 1987 and January 31, 1988.
The Company’s internal control over financial reporting was not adequate during these years. This was due to Paul Polishan’s lack of supervision over the accounting department.
As a result of the inadequate internal controls, the Company’s financial statements were materially misstated. The misstatements caused the stock price of the Company to be artificially inflated.
Investors relied on the false financial statements and purchased shares of Leslie Fay stock at inflated prices. When the truth was revealed, the stock price dropped sharply and investors lost millions of dollars.
The SEC filed a lawsuit against the Company, John Pomerantz, and Paul Polishan for securities fraud. The SEC alleged that the defendants had misled investors by issuing false and misleading financial statements.
The defendants settled the SEC’s lawsuit without admitting or denying any wrongdoing. The Company agreed to restate its financial statements and to adopt new corporate governance policies and procedures.
John Pomerantz and Paul Polishan agreed to pay a total of $3 million in fines and restitution. John Pomerantz also agreed to be barred from serving as an officer or director of a public company for five years.