4. Key eventsNovember 1998 February 1999 November 16 announces
first national advertising campaignto cost $25-30 million2 December
10 announces $200 million three-year creditfacility3 January 21
announces change in fiscal year end fromJanuary 31 to January 304
January 22 announces Super Bowl TV commercial andHummer giveaway
promotion5 January 31 - begins new fiscal year with Super Bowl
TV6commercial/promotion February 2 - announces 1998 fourth quarter
record sales74
5. Why change fiscal year-end? January year-ends arecommon in
the retailindustry 52/53 week years endingSaturday or Sunday
arecommon in the retailindustry Just For Feet also coulddefer into
fiscal 1999 about$6.7 million in costs for theSuper Bowl TV
commercial 5
6. 1998 audit8 Firm Deloitte & Touche LLP,Birmingham, AL
Partner Steven H. Barry with firm since 1976 partnersince 1988
managingpartner since 1996 Manager Karen T. Baker with firm since
1989 2011 Deloitte Global Services Limitedmanager since 1995 6
7. Fraud Risk Factors9 AU 316.85 7
8. Attitudes/rationalizations 9 Nonfinancial managements
determination ofsignificant estimates Excessive interest in
maintaining stock price orearnings trend Practice of committing to
analysts, creditors toachieve aggressive or unrealistic forecasts
8
9. Opportunities 9 Assets, liabilities, revenues or expenses
based onsignificant estimates or subjective judgments thatare
difficult to corroborate Significant transactions, especially those
close toperiod end that pose substance over formquestions
Domination of management by a single person Ineffective oversight
over the financial reportingprocess9
10. Oversight over financial reporting 10 Good Audit Committee
comprised of two outside directors Not so good One member was
president of clients primary bank towhom client owed $189 million
Worse Audit Committee only met once during 1998 10
11. Incentives/pressures 9 Recurring negative cash flows from
operationswhile reporting earnings and earnings growth Need to
obtain additional debt or equityfinancing for capital expenditures
Marginal ability to meet debt repayment orother debt covenant
requirements 11
12. Negative cash flows 1Amounts in $ millions 1994 1995 1996
1997 1998Net income 3 10 14 21 27Cash flow from operations-11
-6-42-26-82Cash on hand36 97139 82 12Current liabilities 69
85147156133Quick ratio 0.52 1.14 0.95 0.53 0.0912
13. Zone of InsolvencyAmounts in $ millionsCash on hand
12.4Annual revenues 774.9Cash flow from operations (82.1)
857.0Divide by 365Daily cash requirement2.3Number of days cash on
hand5.313
14. Debt covenants1 Borrowed $189 million December 1998 1
Borrowed $80 million February 1999 11 Required by bank to maintain
Leverage ratio 3.00 to 1.00 Fixed charge coverage ratio 1.75 to
1.00 Minimum tangible net worth - $230 million Funded debt to
capitalization 0.50 to 1.00 Capital expenditures limit - $25
million 14
15. Accounting misstatements8 8 Advertising co-op credits
receivable $28.9 million ($19 million net of tax)8 Vendor booth
displays $9 million ($6 million net of tax) 8 Allowance for
inventory obsolescence $0.4 million ($0.3 million net of tax)12
Advertising rebate receivable $5.3 million ($3.6 million net of
tax) 15
16. Advertising co-op credits receivable Common in retail
industry Manufacturers help pay for advertising costs To incentive
retailers to buy their products and To promote them in their local
markets Accounting varies Some companies credit advertising expense
tooffset cost of advertising Others credit inventory purchases to
ultimatelyoffset cost of goods sold 16
17. Advertising co-op credits receivable8 Balance of receivable
$28.9 million compared to $0.4 million prior year Client executive
caused accounting to record $23.8 million, of which $14.4 million
was booked in March 1999 17
18. Advertising co-op credits receivable 8 Sufficient
appropriate audit evidence is to be9obtained (AU 326.01) No
supporting documentation for the year-end entries was provided to
test the Existence 8assertion (AU 326.15.b.ii) None of the
purported receivables collected8by the Report Date April 2318
19. Advertising co-op credits receivable Auditors attempted to
confirm balances with8vendors (AU 330.04) 13 vendors owing $22
million of the $28.9 million8 Most of the vendors returned
ambiguous orcontradictory confirmations8 Some of the vendors
returned false confirmations8 At least one false confirmation was
received April22 - one day before the report date13 19
20. Advertising co-op credits receivable8 For confirmation
evidence to be appropriate it must 9be reliable and relevant (AU
330.11) When the auditor has not received replies to
positiveconfirmation requests, he or she should apply 9alternative
procedures (AU 330.31) Auditors apparently evaluated the results of
theconfirmation procedure as having provided"sufficient audit
evidence" (AU 330.33); therefore, 8 The balance was accepted
without adjustment 20
21. Vendor booth displays8 Vendors setup their own merchandise
boothsinside the stores to feature their own products No written
contracts and little documentation Prior to 1996 the booths were
simply providedat no charge21
22. Vendor booth displays, 1996-19978Vendor invoiced client
forpurchase of booth DR Booth Assets CR Accounts PayableVendor then
issued credit forcost of booth to be usedagainst other purchases DR
Accounts PayableCR Expenses22
23. Vendor booth displays, 19988 Eliminated vendor involvement
Client executive simply estimated annual boothvalue, then divided
by 12 for monthly journal entryDR Booth Assets$174,000 CR
Expenses$174,000 Result First 8 months ($174,000 x 8) $1.4 million
October 31, 1998$5.4 million November 1998 January 1999$2.2 million
Total for year$9.0 million 23
24. Vendor booth displays audit8 Since there was no evidence
supporting $9 millionassets, auditors decided to confirm the value
ofbooths (AU 330.11.d)9 Sent confirmations for $8.4 million of
Booth Assetsto vendors Auditors received and accepted ambiguous
replies tothese confirmations The response of at least one vendor
promptedauditors to propose an adjustment (AU 330.33)9,which was
rejected by client24
25. Allowance for inventory obsolescence Just For Feet was in
the fashion retail industry Inventory had almost doubled $400
million, from $206 million prior year1 Leaving almost one-year
supply on hand Cost of goods sold was $452 million for 19981 Yet,
allowance for obsolescence Only $150,000 (0.0375%) Same amount as
prior year8 25
26. Allowance for inventory obsolescence Auditor evaluated
reasonableness of estimate (AU9342.09) Based on incomplete analysis
prepared by client thatwas apparently overlooked by the auditors
(AU8342.10) Auditor proposed $441,000 increase to allowance8(AU
342.14) ; however, 8 Management refused to record the adjustment In
June 1999 client announced that it had14 $50 million excess
inventory as of May 1 26
27. Advertising rebate receivable This scam was not cited in
SEC action regardingauditors8 A client executive: Arranged a fiscal
1999 rebate with outside advertising agency, then Caused that
amount to be accrued as receivable for fiscal 1998, then Arranged
to have agency overbill client by $250,000, so The agency would
have the funds, to then Make a partial payment on the bogus
receivable, to Deceive the auditors into accepting the balance13
27
28. National review partner As a high-risk audit the workpapers
weresupposed to be reviewed by the NationalOffice prior to report
issuance8 Intended to provide reasonable assurance that 9the audit
conformed with GAAS (AU 161.02) ;however, There was no
documentation that this reviewwas done for the 1998 audit828
29. 1999 SEC filings madeWhich included auditor consent The SEC
becomes involved when the auditorconsents to having his/her opinion
included in aclient filing under the 1933 and/or 1934 Acts April 27
1 Form 10-K annual report Form S-8 to register stock for employee
benefit 15plan June 4 16 Form S-4 to register junk bonds 29
30. Key events post-audit June 14 Form 10-Q17 Disclosure of $50
million excess inventory Disclosure of possible loan covenant
violations June 16 - announcement14 Expected 2nd quarter loss
Credit frozen by bank due to covenant violations November 4-
announcement18 Chapter 11 bankruptcy reorganization December 7 Form
8-K19 Auditor resignation January 27, 2000 announcement20
Bankruptcy converted to Chapter 7 liquidation30
31. Criminal and civil penalties 31
32. Criminal penalties 21 Just For Feet executives Don-Allen
Ruttenberg Adam Gilburne Stephen Davis Vendor executives Jonathan
Epstein, Fila USA Timothy McCool, Adidas Thomas Shine, Logo
Athletic Steven Dodge, Converse32
33. SEC civil penalties Just For Feet executives Eric Tyra,
chief financial officer Fined $67,500; 10-year suspension by SEC22
Peter Berman, controller Fined $51,32723 Deloitte & Touche8
Firm paid $375,000 fine Steven Barry suspended for 2 years Karen
Baker suspended for 1 year33
36. References1 Just For Feet, Inc. (1999). Form 10-K for the
Fiscal Year Ended January 30, 1999 (CIK: 00000918111). Retrieved11
July 2011 from Securities and Exchange Commission www.sec.gov.2
Just For Feet, Inc. (1998). Just For Feet Hires Agency To Create
Launch Ad For National Branding Campaign ToPremiere On Superbowl.
Retrieved 11 July 2011 from PR Newswire www.prnewswire.com.3 Just
For Feet, Inc. (1998). Just For Feet, Inc. Closes $200,000,000
Credit Facility. Retrieved 11 July 2011 from PRNewswire
www.prnewswire.com.4 Just For Feet, Inc. (1999). Just For Feet,
Inc. Announces Comparable Store Sales for Quarter toDate,
Preliminary Estimates and Change in Fiscal Year. Retrieved 11 July
2011 from PR Newswirewww.prnewswire.com.5 Just For Feet, Inc.
(1999). Just For Feet To Give Away a New Hummer During Super Bowl.
Retrieved 11 July2011 from PR Newswire www.prnewswire.com.6 Stuart
Elliott (1999). At $1.6 million for 30 seconds, few commercials
proved worthy of their Super Bowlspotlight. The New York Times
February 2, 1999. Retrieved 11 July 2011 from PR
Newswirewww.nytimes.com.7 Just For Feet, Inc. (1999). Just For
Feet, Inc. Announces Record Sales and Comp Store Sales For The
FourthQuarter. Retrieved 11 July 2011 from PR Newswire
www.prnewswire.com.8 Securities and Exchange Commission (2005).
Accounting and Auditing Enforcement Release No. 2238, April26,
2005, in the Matter of Deloitte & Touche LLP, Steven H. Barry,
CPA and Karen T. Baker, CPA, Respondents.Retrieved 11 July 2011
from www.sec.gov. 36
37. References9AICPA (2010). Professional Standards, Volume 1,
as of June 1, 2010.10Just For Feet, Inc. (1999). Proxy Statement
Pursuant to Section 14(a) of the Securities Exchange Act of
1934(CIK: 00000918111). Retrieved 11 July 2011 from Securities and
Exchange Commission www.sec.gov.11Just For Feet, Inc. (1999).
Credit Agreement dated as of December 10, 1998 among Just For Feet,
Inc. asBorrower, and The Lenders Named Herein, Compass Bank, et al.
(Exhibit 10.5 to 1999 Form 10-K, CIK:00000918111). Retrieved 11
July 2011 from Securities and Exchange Commission www.sec.gov.12
Securities and Exchange Commission (2003). Securities and Exchange
Commission v. Adam Gilburne.Litigation Release No. 18139, May 15,
2003. Retrieved 11 July 2011 from www.justice.gov.13United States
District Court for the Northern District of Alabama (2004). United
States of America v. JonathanG. Epstein, Defendant. Retrieved 11
July 2011 from www.justice.gov.14Just For Feet, Inc. (1999). Just
For Feet, Inc. Responds to News Releases and Elaborates on
Specialty StoreDifficulties. Retrieved 11 July 2011 from PR
Newswire www.prnewswire.com.15Just For Feet, Inc. (1999). Form S-8
Registration Statement under the Securities Act of 1933.
CIK:00000918111. Retrieved 11 July 2011 from www.sec.gov.16Just For
Feet, Inc. (1999). Form S-4 Registration Statement under the
Securities Act of 1933. CIK:00000918111. Retrieved 11 July 2011
from www.sec.gov.17Just For Feet, Inc. (1999). Form 10-Q for the
Quarter Ended May 1, 1999 (CIK: 00000918111). Retrieved 11July 2011
from Securities and Exchange Commission www.sec.gov. 37
38. References18Just For Feet, Inc. (1999). Just For Feet, Inc.
Announces Filing for Relief Under Chapter 11 of the BankruptcyCode.
Retrieved 11 July 2011 from PR Newswire www.prnewswire.com.19Just
For Feet, Inc. (1999). Form 8-K Current Report as of December 7,
1999 (CIK: 00000918111). Retrieved 11July 2011 from Securities and
Exchange Commission www.sec.gov.20 Just For Feet, Inc. (2000). Just
For Feet, Inc. Announces Asset Auction. Retrieved 11 July 2011 from
PRNewswire www.prnewswire.com.21United States Department of Justice
(2004). Corporate Fraud Task Force Second Year Report to the
President.Retrieved 11 July 2011 from www.justice.gov.22Securities
and Exchange Commission (2005). Securities and Exchange Commission
v. Eric Tyra, Scott Wynne,Peter Berman and Scott Carey. Litigation
Release No. 19438, October 20, 2005. Retrieved 11 July 2011
fromwww.sec.gov.23Securities and Exchange Commission (2005).
Securities and Exchange Commission v. Eric Tyra, Scott Wynne,Peter
Berman and Scott Carey. Litigation Release No. 19163, March 31,
2005. Retrieved 11 July 2011 fromwww.sec.gov.23Lattman, Peter
(2007). Settlement in Just For Feet Case May Fan Board Fears. The
Wall Street Journal April23, 2007. Retrieved 11 July 2011 from
www.wsj.com.25 Just For Feet, Inc. (1999). Super Bowl TV
Commercial. Retrieved 11 July 2011 from YouTubewww.youtube.com.
38