Reference no: EM13480131

Please help me with these problems Merry -Go -Around (MGR) a clothing retailer located primarily in shopping malls, was founded in 1968. By the early 1990s, the company had gone public and had expended to approximately 1,500 stores, 15,000 employees, and 1 billion in annual sales. The company location in the malls targeted the youth and teen market. The company was listed by Forbes magazine as one of the 25 companies in the late 80s. However, in the early 90s, the company faced many challenges. One of its co-founders died and the other left to pursue unrelated business interests. The company faced stiff competition from other retailers ( eg, The gap, and banana republic), fashion trends changed and mall traffic declined. Sales fell, and experts speculated that MGR failed to anticipate key industry trends and lost sights of its customer markets. To try to regain and its strong position, the company acquired Chess King, inc. a struggling chain of men's clothing stores located in malls, in 1993. The company's continued to fail, and later in 1993, it brought back one of its cofounders to manage the company and wrote down a significant amount of inventory. However, this inventory write down caused the company to violate loan covenants. Facing bankruptcy, the company, based on the advice of its newly hired law firm Swidler and Berlin, hired turnaround specialists from Ernest and Young (and Berlin, hired turnaround specialists from Ernest and Young and Berlin, hired turnaround specialists from Ernest and Young (E & Y) to help overcome the financial crisis and develop a long term business plan. However, the company declined continued, and it filed for Chapter 11 reorganization in 1994. In 1996, the remaining assets were sold for pennies for a dollar. Subsequently, a group of 9,000 creditors (including former employees and stockholders) began litigation against parties it deemed responsible for their loses. These parties included E & Y, which the creditors sued for $4 billion in punitive and compensatory damages (E & Y's fees from MGR totaled $4.5 million. The lawsuit alleged that E&Y's incompetence was the main cause of MGR's decline and demise. The lawsuits alleged in part that;

1. The turnaround team did not act fast enough

2. The leader of the team took an eight day vacation at a critical point during the engagement

3. The cost cutting strategy called for only 11 million in annual savings despite the fact that the company was projected to lose up to $200 million in 1994.

4. While to store closings were key to MGR's survival, by 1995 only 230 of 1,1434 stores had been closed and MGR still operate two stores in some malls.

5. The turnaround team included inexperienced personnel, a retired consultant, a partner with little experience in the united states and with retail firms, and two recent college graduates

6. E&Y charged exorbitant hourly rates and charged unreasonable expenses (eg, charges included reimbursement for dinner for three of the consultants totaling in excess of $200 E & Y denied any wrong doing but in April 1999 agreed to pay $185 million to settle with injured parties Required:

A. Although this was not an audit engagement for E&Y, some of the allegations against the firm can be framed in terms of the10 generally accepted auditing standards. Which of the 10 GAAS was E&Y alleged to have violated?

B. Indicate which of the principles underlying an audit conducted in accordance with GAAS E&Y allegedly violated?

C. Should there be specific professionally standards for CPAs who consult? Given that non-CPAs who consult so not have a formal professional standards, describe the advantages and disadvantages that result from such standard s