Audit: the North Face

This case titled “The North Face” examines the accounting schemes used by North Face executives to enhance the company’s revenues and profits. These schemes primarily involved violations of the revenue recognition rule for certain barter and consignment transactions arranged by the company’s chief financial officer and vice-president of sales. Deloitte served as North Face’s auditors during the period when the company’s operating results were manipulated. The SEC’s investigation revealed that personnel of the prominent accounting firm had altered the workpapers prepared during an earlier North Face audit to conceal a critical judgment error made by a Deloitte audit partner.

The SEC revealed that Richard Fiedelman failed to document changes that his subordinates had made in the 1997 North Face workpapers. The auditor’s working papers provide the principal support for the auditor’s report, including his representation regarding the observance of the standards of field work, which is implicit in the reference in his report to generally accepted auditing standards. It therefore follows that any addition, deletion, or modification to the working papers after they had been finalized in connection with the completion of the audit may be made only with appropriate supplemental documentation, including an explanation of the justification for the addition, deletion, or modification.

The SEC also criticized Fiedelman for failing to exercise due professional care while reviewing North Face’s financial statements for the first quarter of 1998. “The exercise of due professional care allows the auditor to obtain reasonable assurance that the financial statements are free of material misstatement, whether caused by error of fraud” (PCAOB, 2002). Fiedelman allowed additional non-recognizable revenue to be posted as well as changing the original working papers that reported the original material misstatement.