Health Management

Case 1.4 Health Management

Q. #2 According to court testimony, on July 20, 1995, Drew Bergman recommended to HMI’s board of directors that Mei-ya Tsai be hired as the companies CAO. One week later, BDO Seidman issued its audit report on HMI’s 1995 financial statements. Under presently existing professional standards would this situation have presented an independence problem for BDO Seidman.

Also, Q. #1BDO Seidman’s attorney pointed out correctly that professional standards do not prohibit auditors and client personnel from being “friends.” At what point do such relationships result in the violations of the auditor independence rules and guidelines? Provide hypothetical examples to strengthen your answer.

Among the ten generally accepted auditing standards is the standard that requires an auditor to have independence in mental attitude. As with so many rules and guidelines set forth by the government and numerous other organizations, the interpretations of many of these rules can be vastly subjective. During the case against Health Management’s founder Clifford Hotte, his co conspirators and the auditors at BDO Seidman the defendant’s attorney Michael Young brought forth the idea that according to the generally accepted auditing standards that requires an independence of mental attitude it never formally states that a friendship between an auditor and the client is be completely prohibited. The dilemma with deciphering the interpretation of the standard is determining where the line should be drawn between these relationships and the auditor’s ability to maintain these relationships and the independence considered necessary to give an unbiased opinion when it comes time to write a report that is unprejudiced and reliable to the public and investors at large.

Let us begin with Health Management’s CEO Clifford Hotte and CFO Drew Bergman’s 1995 inventory fraud scandal by which author Michael C. Knapp’s assertion could be considered as one of the least...