Auditors and Regulatory Oversight

AgFeed Industries fraud

1) Analyze the audit report that the CPA firm issued. Ascertain the legal liability to third parties who relied on financial statements under both common and federal securities laws. Justify your response.

In March 2014, the Commission charged AgFeed Industries with securities law violations based on a “massive accounting fraud” involving the company’s China operations. The SEC sued certain executives and directors, including the company’s U.S.-based audit committee chair, who allegedly “failed to conduct or prompt the company to conduct any further meaningful investigation” after learning about the misconduct.

According to the SEC, AgFeed's Chinese management kept two sets of books - a real one and a fake one to present to investors. The “inside” real set of books contained accurate, lower revenue numbers that were hidden from auditors. Li, Xiong, Jin, and Ouyang caused AgFeed to report false revenues of approximately $239 million. From 2008 through June 2011, they inflated the company's revenue by $239 million by using phony invoices for feed and hog sales and by inflating hog weights because fatter hogs fetched higher prices. To cover up the fraud, they later reported the fake hogs had died. AgFeed, which filed for bankruptcy in July 2013, was based in China and publicly traded on the Nasdaq OMX stock exchange. Igor Gothner served as the chief executive officer of the company from December 2011 through the summer of 2013, though the SEC's complaint only charges him for events that occurred in his role as an independent director, the company's audit committee chairman and vice chairman at AgFeed.

2) Speculate on which statement of generally acceptable auditing standards (GAAS) that the company violated in performing the audit.

Goldman Parks Kurland Mohidin, LLP and McGladrey Pullen, LLP, two auditing firms retained by AgFeed, reportedly made false and misleading representations because the firms did not meet the independent...