The Leslie Fay Companies

In 1969, Paul Polishan received his accounting degree and was hired with an entry-level position at Leslie Fay Company. During this day and age, Leslie Fay created women’s clothing which mainly focused on dresses for middle-aged women. In 1972, John Pomerantz became the President of Lesley Fay. Paul Polishan, who was a close friend of John, became “Chief Financial Officer and Senior Vice President of Finance” (Knapp, 2011, p. 71) not too long after that. Polishan dominated all accounting and financial reporting functions along with his subordinates. Any individual who did not follow Polishan’s strict policies and rules were subject to severe disciplinary action. If a top manager requested the company financial information, Polishan demanded to have an explanation of why the information was needed. Polishan was definitely hiding something.

In 1993, the company controller – Donald Kenia – came forward stating that he was involved in the accounting fraud that had taken place the three years previous. Kenia went so far as to say he was the sole instigator of this fraud when, in fact, the main perpetrator was Polishan. Polishan required Kenia to take responsibility for the recording of several inappropriate journal entries. These journal entries were not consistent with GAAP and misrepresented events and drastic overstated profit margins for the years in question. Leslie Fay’s financial ratios were stable and consistent despite the drop in the women’s apparel market. Also, during the periods in question, there was a growing change in the fashion industry. Women no longer wanted to wear dresses but were turning to stylish jeans and t-shirts.

Two types of misstatements pertinent to fraud and important to auditors are “misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets” (AICPA AU 316). “Misstatements arising from fraudulent financial reporting” (AICPA AU 316) are deliberate and are designed to...