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• W801709545 abstract "Joe Defraud finished his breakfast. Joe had been with Grant Thornton for 15 years and was the lead auditor on the Refco engagement. He had just talked to Grant Thornton's legal counsel and had learned that a class action suit had been filed against the CPA firm regarding its involvement with Refco. Concerned about the repercussions to his career, he nervously opened the newspaper. While wondering if the audit team had missed red flags pointing to the fraud, he read the feature article in the financial section. From IPO to Bankruptcy in Nine Weeks On October 10, 2005 Refco, Inc. announced that an entity controlled by its Chief Executive Officer, Phillip R. Bennett,owed 430[dollar] million to Refco. This amount was listed in Refco's financial statements, but was not disclosed as a related party transaction. Refco immediately announced that the public could no longer rely upon its financial statements for 2002 through 2005. Just two months earlier, Bennett, himself, rang the opening bell at the New York Stock Exchange to celebrate Refco's first day of public trading. By the end of this first day, the value of Refco's stock had increased by an impressive 25%. Now the stock's value dropped as rapidly as it had previously grown. Many of Refco's clients immediately liquidated their accounts, further depleting Refco's assets and resulting in the fourth largest bankruptcy filing in the United States. Refco's independent auditor, Grant Thornton, had issued an unqualified opinion on the financial statements filed with the registration statement. While internal control deficiencies were identified, Grant Thornton did not discover undisclosed related party transactions. Were there any risk factors or signs that should have alerted the auditor to a violation of Generally Accepted Accounting Principles (GAAP)? Company Background Refco Inc. (RFX) was incorporated in Delaware with its principal executive offices in New York City. The company provided financial services to customers, primarily brokering commodities, and futures contracts. Founded in 1969 as E. Friedman and Co., Refco eventually expanded to 23 locations in 14 countries, served over 200,000 customer accounts and became the largest broker on the Chicago Mercantile Exchange in 2004. Revenue was earned from transactions with customers and from interest on cash balances in customer accounts. In August 2004 the private equity firm Thomas H. Lee Partners acquired a 57% interest in Refco. Refco's management retained a significant ownership interest. Thomas Lee, a 1965 graduate of Harvard College and founder of Lee Partners, stated that the ultimate goal was to take Refco public. Praising Refco's management team, Lee noted: We're a company that likes to invest in businesses that have strong growth opportunities and outstanding management teams, and this really has both. As Lee had predicted, Refco announced an initial public offering of 26 million shares at 22[dollar] per share on August 11, 2005. Because of previous years' profit growth, investors eagerly purchased shares and by the end of the first day of trading the company's shares had gained 25%. Participants to the IPO included CS First Boston, Goldman Sachs, and Banc of America Securities, as the principal underwriters, and the accounting firm, Grant Thornton, as the auditor of the financial statements filed with the prospectus and registration statement. Management Ray Friedman and his stepson, Thomas Dittmer founded E. Friedman and Co. (Refco) in 1969. Friedman had grown up in Iowa, where his family was poor and made money by selling chickens and eggs. A few years later, the experience with his family's enterprise led the ambitious Friedman to establish the company American Produce, through which he sold farm products to retailers and the United States Army. Success was short lived, however, and in 1952 Friedman was convicted for falsifying the meat stamps on chickens sent to army troops in Korea. …" @default.
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• W801709545 date "2009-01-01" @default.
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• W801709545 title "Refco: Outwitting the Auditors" @default.
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