E&Y Partner Falsifies NextCard, Inc. Work papers

StoryIn September 2003, former Ernst & Young partner Thomas C. Trauger was arrested for obstructing an examination into NextCard Inc. by federal-bank regulators by altering and deleting working papers from its year 2000 audit of the company. (Bryan-Low & Weil 2003) On October 31, 2001, NextCard announced in a press release that the Office of the Comptroller of the Currency had asked the company to make certain changes regarding NextBank's accounting practices, including changes regarding the classification of losses on credit cards. NextBank, the bank subsidiary, was also asked to change the treatment of some allowances and securitizations of loans. In the summer of 2001, the Office of the Comptroller of the Currency asked Ernst & Young for a portion of its audit working papers regarding E&Y's audit of NextCard. (Bryan-Low & Weil 2003) Trauger became concerned that E&Y's audit work would be examined. Along with the help of two senior managers, Trauger is alleged to have ordered the altering of audit documents and destroying documents that were inconsistent with the changes he was directing. These alterations consisted of both addition and deletions to the work papers. Specifically, the audit partner altered the summary review memorandum as well as memoranda regarding the audit of NextCard's allowance for loan and lease losses securitizations of receivables. (SEC 2003) It is alleged that Trauger had his senior managers change the date on their laptop computers to make it seem like the work on the documents had been done during the time the original audit had actually occurred. The alterations and deletions made it appear as though E&Y had thoroughly considered all of the appropriate issues and available facts relating to NextCard's allowance for loan losses and NextCard's securitization of receivables. (SEC 2003) A SEC official said Trauger, who had approved an earlier "clean audit" of NextCard, was trying to downplay or eliminate evidence of problems that would have been red flags. (Iwata 2003)

Discussion Questions

¦ How are work papers important to proving that the audit was done correctly?

¦ What would an auditor accomplish by altering or destroying the work papers?