Grant Thornton re-staffed the Winstar engagement team with a partner and senior manager before the 1999 audit but neither professional had ever audited a

Winstar Case Study

Winstar Communications was a a telecommunication company founded in 1993, starting off as a long-distance reseller it quickly developed into the business of fixed wireless system. By the early 2000s, Winstar became one of the top providers of wireless technology offering wide ranges of services to their clients. Grant Thorton, a audit service, began their work with Winstar in 1994 and ended in April 2001 when Wisntar filed for bankruptcy. At the end of Winstar’s operations in 1999 they expressed their dissatisfaction with Grant Thorton’s services and threated to terminate the relationship. By doing so, Grant Thorton re-staffed the Winstar audit team including a partner and senior manager who had never conducted an audit in the telecommunication industry. The new audit team encountered several unusual transactions, all of which causing an overstated amount of total revenues in 1999. Causing investors to rely on the fraudulent financial statements. After a court ruling, a federal court judge grated certification that any Winstar investors that purchased stock between March 2000 and April 2001 could take legal action against Grant Thorton as well as receive compensation from Winstar Communications for their investment losses.

After going over the case study and reviewing the AICPA Attestation standards, I think the auditors from Grant Thorton were not adequately prepared for the engagement with Winstar Communications. The new auditors had zero prior experience with any type of company in the telecommunication industry. With respect to AT-C Section 105A, Concepts Common to All Attestation Engagements, the section of Quality Control states that “the engagement partner should be satisfied with the engagement team, any practitioner’s external specialists, have the appropriate competence, including knowledge of the subject matter”. After seeing this section, I could determine that from the beginning this engagement was going to be problematic. Winstar already had dissatisfaction with Grant Thorton causing them to restaff the entire audit team with no prior experience. Grant Thorton never appeared to bring in any sort of expert of telecommunications that would help assist the new auditors in understanding the industry, and its usual way of conducting business and viewing any unusual transactions that occurred. In the article, it seems that every time Grant Thorton found red flags in their audit procedures, they ended up issuing an unqualified opinion in 1999, which states “the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with GAAP”. In conclusion, the overall procedures taken by Grant Thorton were not sufficient to be properly prepared to perform this audit. Whether it be from the initial restaffing of the audit team of which the partner and senior manager had no knowledge or prior experience with the telecommunication industry, the inability to bring experts on the industry to assist, and that they were being pressured to complete the audit.

The lack of expertise from the auditors in the telecommunications industry was indeed problematic in conducting the audit. Although Grant Thorton could have done a much better job in following certain procedures in completing the audit knowing that they lacked expertise in this industry. In the Attestation Standards, Assignment of the Engagement Team and Practioners Specialists, it states “the practitioner may obtain knowledge about the specific subject matter to which the procedures are to be applied through formal or continuing education, practical experience, or consultation with others.” This standard does not state that the auditor must be an expert or have knowledge in the industry. Through proper procedures the audit team should have used outside experts to help them in auditing Winstar communications. Another flaw in audit procedure was not reviewing the Audit Documentation of prior years. In AS 1215: Audit Documentation, it states, “auditors who are new to an engagement and review the prior year’s documentation to understand the work performed as an aid in planning and performing the current engagement” and “a successful auditors reviews a predecessor auditor’s audit documentation”. This shows me that yes, even though the new partner and senior manager had no prior knowledge about the telecommunications industry it was problematic in doing the audit, but Grant Thorton had the necessary resources required to properly conduct an audit of the caliber.

Reassigning auditors is not inappropriate, it is indeed more than necessary to do so. This allows there to minimize possible bias in conducting the audit process. This act prevents auditors from building relationships with management and keeping their overall independence as an auditor. Once an auditor’s independence is compromised, the users of those financial statements will not rely on the audit reports to make their investing decisions. Therefore, the reassignment of auditors is a key aspect in keeping all auditors independent so that the users can confidently rely on the audit results of a company.

The Sarbanes Oxley Act of 2002, Section 203 states “mandatory rotation of the lead partner and the concurring partner every five years. These rules expand the number of engagement personnel covered by the rotation requirement and clarify the time out period.” The changing of auditors is to maintain independence and remain reliable. Once compromised the auditors work becomes useless and conflicted. Its purpose is also to not allow auditors to remain comfortable with said client, the building of a relationship between an auditor and client increases the likelihood of possible non-audit services, possible compensation, and of course diminishing of auditor’s independence. Remaining independent is what truly makes an auditor reliable, by reassigning auditors like in the case of Grant Thorton they were trying to keep independence amongst the audit procedure.

References

ACFE, 2019. Fraud examiners manual. U.S Edition ed. S.1 Association of Certified Fraud Examiners

Alexander W. Ng Lasse Mertins Charles L. Martin , (2015)," Winstar Communications: corporate fraud and auditing procedures ", The CASE Journal, Vol. 11 Iss 2 pp. 147 – 162

“AS 1215: Audit Documentation.” Default, pcaobus.org/oversight/standards/auditing-standards/details/AS1215.

Final Rule: Strengthening the Commission's Requirements Regarding Auditor Independence; Rel. Nos. 33-8183, 34-47265; 35-27642; IC-25915; Ia-2103; File No. s7-49-02, www.sec.gov/rules/final/33-8183.htm.

“Statements on Standards for Attestation Engagements.” AICPA, www.aicpa.org/research/standards/auditattest/ssae.html.

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