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Abstract: In February 1938, the police arrested Raymond Marien, a small, bookish man, for forging checks at Interstate Hosiery Mills, Inc. During the ensuing investigation, the New York Attorney General's office found that Marien had "juggled" the books of the corporation and that these accounting irregularities inflated Interstate Hosiery Mills' assets by $1.9 million or about 40% of the company's assets. In an irony of history, the company's external auditors, as it turned out, employed Marien. The extensive investigation conducted by the SEC into Marien's manipulations found that, save for forged checks amounting to about $2,000, Marien and others were exonerated from any financial gain in the fraud due to the increased value in Interstate's shares. In the end, the fraud and the SEC rulings would serve as a foundation of many modern accounting and auditing principles related to auditor independence, supervision, and management responsibility.
INTRODUCTION
The American Institute of Certified Public Accountant's (AICPA) [2009] trial-board proceedings from March 2009 reported that the Institute disciplined a CPA from New York under rule 101 of the Code of Conduct. According to the complaint, "The auditor created journal entries, coded deposits, and disbursements for reporting in the general ledger without obtaining client approval. As a result, the auditor audited his own work." This was a classic case of a lack of independence on the part of an auditor. The AICPA suspended the member and required him to complete 50 hours of continuing professional education and submit to a peer review. The AICPA's decision highlights the importance placed on the concept of independent audits, with the genesis of rules that can be traced to a 1938 Securities and Exchange Commission (SEC) ruling that dealt with Interstate Hosiery Mills, Inc. (IHM) and Raymond Marien, an employee of the firm's independent auditors.
The following paper details the story of Raymond Marien's fraud at IHM. As the evidence will show, the exact amount of the fraud or the methods followed to accomplish it were never pinpointed definitively. Thus, the paper will present the balances from various sources to give as complete a picture as possible of the financial events that led up to the SECs report and ruling even though the numbers may not directly reconcile. The materials used...