SEC: How Ex-PwC Auditor Missed Fraud

Former audit partner settles charges that detail repeated failure to validate records at "Grand Theft Auto" game-maker Take-Two.
Stephen TaubFebruary 12, 2008

A former PricewaterhouseCoopers audit partner for Take-Two Interactive Software Inc. settled civil charges related to the accounting fraud at the publisher of the blockbuster “Grand Theft Auto” video-game series.

In a Securities and Exchange Commission order, Robert A. Fish agreed to be barred from appearing or practicing before the SEC as an accountant, although he can apply for reinstatement after one year, according to the regulator.

Fish was the audit engagement partner responsible for the fiscal (October) 2000 audit at the video game publisher. According to the SEC’s order, Take-Two fraudulently inflated its revenues and after-tax earnings in fiscal 2000 financial statements by arranging with several distributors to “park” several hundred thousand computer and video game units at or near the end of fiscal quarters or the fiscal year.

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According to the SEC, in the course of PwC’s 2000 audit, Fish failed to exercise due professional care and obtain sufficient competent evidential matter to verify the existence of Take-Two’s $104 million domestic accounts receivable balance, the company’s single most important asset as of Oct. 31, 2000, and which Fish had identified as a higher risk audit area.

Under Fish’s supervision, PwC sent requests for confirmation of Oct. 31 accounts receivable balances to 15 of Take-Two’s customers. In response, PwC received only one confirmation, which turned out to be false, representing less than two percent of the total domestic accounts receivable balance, according to the commission.

The order said that Fish performed alternative audit procedures to verify the accounts receivable, but those procedures were insufficient under Generally Accepted Auditing Standards (GAAS).

In addition, the Fish failed to exercise due professional care and skepticism in testing the adequacy of Take-Two’s 5-percent reserve for estimated sales returns as of Oct. 31, as required by GAAS, according to the commission.

The SEC said that during the 2000 audit, Fish and others at PwC, at his direction, examined five product returns made after year end but failed to compare them with original sales invoices. “Had he done so, he would have discovered that in four of the five instances, more than 75 percent of the games purportedly purchased were returned,” the SEC stated.

The four sales with abnormally high return rates were in fact fraudulent parking transactions, the SEC asserted.

Take-Two may be in the running for the restatement record this decade. It revised results three times between Dec. 14, 2001, and February 2004 as a result of improper accounting. In addition, it restated results after discovering that stock option grants had been assigned dates that differed from the actual date of the grant.