Softnet Systems: Fraud or Expertise

It was in December 2002, and Peter Sullivan, partner in charge of the audit engagement at Softnet Systems was becoming uneasy with their client’s accounting practices. Peter was a partner at John Sanders LLP, a global public accounting firm that had been appointed as the new auditors of Softnet. Although the firm was a new client to John Sanders LLP, Peter’s firm regarded Softnet as a very important client, primarily due to the size of the client and its place in the industry. Peter was worried that any problems with Softnet’s accounting practices could lead to disagreements with the client and jeopardize the relationship between John Sanders LLP and Softnet. Regarding the Softnet audit engagement, Peter had this to say, “Softnet is an important client to us and I want this audit to go smoothly. However, issues with our client’s accounting practices may lead to problems.” What worried Peter the most was that source and other supporting documents needed to confirm a significant portion of Softnet’s revenues and accounts receivable were missing under strange circumstances. Furthermore, Softnet’s management was not cooperating with the auditors’ scrutiny of their revenue recognition practices as well as their judgments on accounts receivable collectibility.