Question

CASE 5.3 Caesars Entertainment Corporation The gambling known as business looks with austere disfavor upon the business known as gambling. Ambrose Bierce In the early 1930s, the Great Depression forced engineering student William Harrah to drop out of UCLA. Known as a 'hustler" by his friends, Harrah began operating a bingo parlor to support himself. After repeated confrontations with law enforcement authorities that centered on the legality of his bingo games, Harrah moved his busi ness operations to Nevada, which had less restrictive gambling laws than California. Over the next several decades, the resourceful and enigmatic entrepreneur assem- bled an impressive collection of gaming properties.' Harrah eventually took his com pany public in 1971 to raise the funds he needed to build the crown jewel of his business empire, the five-star hotel and gaming resort Harrah's Lake Tahoe. In 1973, William Harrah registered Harrah's Inc. with the New York Stock Exchange, making it the first gaming company listed on the Big Board. In 2005, long after its founder's death, the renamed Harrah's Entertainment Inc., became the nation's largest gaming company when it acquired the opulent Caesars Palace in Las Vegas and dox ens of other major gaming properties operated by one of its primary competitors. The company's executives eventually renamed the firm Caesars Entertainment Corporation and listed its common stock on the NASDAQ under the ticker symbol CZR. Over the years, Caesars and its predecessors have had more than their fair share of run-ins with regulatory authorities due to the company's aggressive business prac tices. In early 2013, the Securities and Exchange Commission (SEC) launched an investigation involving Caesars. Ironically, the investigation was not prompted by any actions or decisions by the company's executives but rather by the conduct of James T. Adams, a former partner of the company's audit firm, Deloitte & Touche (Deloitte). Adams had served as the advisory partner on Deloitte's 2008 and 2009 audits of Caesars. During 2009, Adams had allegedly engaged in certain "gaming activities at a Caesars casino that made the SEC question Deloitte's independence during the 2009 audit. Exhibit presents the one-paragraph disclosure made by Caesars of the SEC investigation while it was in progress As noted in Exhibit I. Caesars and Deloitte performed their own independent investigations and concluded that Adams' actions had not impaired Deloitte's independence. Also notice Caesars reported that if a contrary conclusion was ulti- mately reached by the SEC, there could be "material adverse consequences for the company L. In addition to accumulating gaming properties, Harrah eventually collected more than 1,000 vintage cars-cach of which he insisted on driving at least one mile every year and six ex-wives. He was mar ried to his seventh wife when he died in 1978 2. Caesars became a Deloitte audit client in May 2002 shortly after the company dismissed Andersen &

1. Do you agree with Deloitte's assertion that Adams had no "substantive role" in the 2008 and 2009 Caesars audits? Defend your answer.

2. The SEC applies a principles-based approach to mitigating the risks that may undercut auditor independence. Identify the four guiding principles applied by the SEC to protect the independence of auditors of public companies.

3. Assume Adams had used his personal funds to finance his gaming activities in the Caesars casino. Under those circumstances, would he have violated any ethical or professional standards? Again, defend your answer.

4. The SEC observed in AAER No. 3554 that "any loan... to or from an audit client" is "inconsistent" with auditor independence. Despite that statement, are there any circumstances in which an auditor can have an outstanding loan from an audit client? Explain.

Answer 1

Refer the below images for the above asked questions, in a detailed way of explanation with reference sections.

Requirement 0 : Deloitte's Adams audits? assertion and 2009 Do you agree with "substantive role your answer. had no Defend that Caesars in the 2008 Answer: swer: In my wiew, the advisory partner's role in the Caesors audits - as described by the SEC in AMER No. 3554 - Was a Substantive role Audit Committees of SEC registrants play a very important role in the audits of those companies The primary feature of that role is to serve as a liaison between the client's management team and the team of auditors. Given Adam's experience and expertise, it seems only see to conclude that audit committee members would have youth relied on him when they were addressing audit rela including issues raised by Caesars management from a raised by auditors. As a result Adams likely hoo to shape the cudit Committees discussion of these issues, it not the manner in which they were resolved - Seems only reasonable were addressing audit related issues, 6 the x ②: The the risks the four independence Rear SEC applies a principle -based approach that may undercut auditors independence. guiding principles applied by the SEC to of auditors of public companies: to mitigating Identity protect the Requirement Answer Here are th four general principles applied by the SEC to promote the independence of auditors: a. An auditor is not independent when he cor) she has a mutual (or conflicting interest with a client. b. An auditor is not independent when he cor) she audits his (or her own firm's work. c. An auditor is not independent when he cor) She functions as a member of management cor) as an employee of a client. de An auditor is not independent when he cor) She acts in an advocacy role for a client.

: Reasuirement Assume Adams had used his personal funds his gaming activities in the Caefars casino. under circumstances would he have violated any ethical Professional Standards ? Again Defend your answer. to finance those cor) Answerſ: I would suggest that, technically, Adams would not have violated any ethical cor) professional Standards by using his private resources to finance gambling sprees in a caesars Casino. In this particular case, the SEC's concern was not w Adam's gambling activities in a client's casino but rather the fact that he borrowed the funds from the client to gamble. Although there are exceptions, auditors are generally not precluded from purchasing cor utilizing business services con products of audit clients. Having said that, it is arguably not a good idea for auditors to gamble large soms in an audit client's casino because doing so could cause third partiel to question their independence and professionalism understand that it a given auditor is gambling Sums that are clearly material to the given gaming client and for himself cor) herself, that would certainly call in to Question the auditor's independence. Such conduct would violate the SEC'S auditor independence principle involving conflicts of interests. Likewise, such conduct would quality as a conflict of interest under the AICPA code of professional conduct – see section ET 1.100, e conflicts of Interest ".

Reajuivement The SEC observed in AAER No 3554 that "any loan to lov) from an audit client " is rinconsistent with auditor independence. Despite that statement are there and circumstances in which an auditor can have an outstanding loan from an audit client ? Explain - Answer: The revised AgcpA code of professional conduct identifies Specific circumstances in which auditors can have outstanding loans from an audit etrent such loans include, among others, home mortgages, secured loans, immaterial unsecured loans, automobile loans, and loans folly collateralized by the cash surrender value of an insurance Ddicy. For a detailed discussion of the Specific Circumstances under which Soch loans are acceptable, See section Er 1.260, "Loans, Leases and Guarantees of the AICPA code. As a general rule, the SEC'S auditor for independence rules outstanding loans from audit client are consistent with those of the Alcpt. (The PCAOB does not have separate auditor independence of roles relating to outstanding loans from audit clients and instead invokes the relevant SEC roles) The fact that the SEC permits certain auditor -dient loans begs the question at why the SEC representative would state in AAGR No. 3554 that in any loan to cor) from an audit client " is "inconsistent with auditor independence- Most likely, the SEC representative was simply reinforcing the general principle that auditors should avoid having loons from audit clients.