Synopsis

National Student Marketing Corporation (NSMC) used a series of acquisitions to increase its consolidated revenues from $723,000 during the fiscal year ended 31 August 1967 to $5 million in fiscal 1968 and $68 million in fiscal 1969. The company collapsed even faster than it had grown after Barron’smagazine published an article questioning the quality of NSMC’s reported earnings. NSMC founder Cortes (Cort) Randall was sentenced to 18 months in prison after pleading guilty to four counts of conspiracy and fraud.

Discussion Questions

1. How was NSMC able to increase its annual revenues from $723,000 to $68 million in only two years?
2. What factors led to Cort Randell’s ouster from NSMC?
3. What questions should PMM have asked Arthur Andersen before accepting the NSMC audit engagement?
4. What audit procedures should PMM have performed to test NSMC’s fixed-fee marketing contracts?
5. What should PMM have done upon learning that $1.4 million of the $1.7 million of revenue accrued by NSMC at the end of fiscal year 1968 was written off during the first three quarters of 1969?
6. What should PMM have done in October 1969 when NSMC refused to issue a revised proxy statement to its shareholders?