SDSU Accounting The Rise and Fall of Heilig Meyers Case Questions

1.4 Part one requirements
1. What facts presented in the case suggest that Heilig—Meyers might have trouble continuing as a going concern?
2. What facts presented in the case suggest that Heilig—Meyers will be able to continue in
business at least through February 28, 2001?
3. Based on the information in the ease, do you think Heilig—Meyers’ auditors should have
modified their report on the company’s February 29, 2000 financial statements to
express substantial doubt about Heilig—Meyers’ ability to continue as a going concern?
Why or why not?
Exhibit 4
Heilig—Meyers company consolidated balance sheets (amounts in thousands)
February 29/28
2000
1999
Assets
Current assets
Cash
Accounts receivable, net
Retained interest in securitized receivables at fair value
Inventories
Other current assets
Net assets held for sale
Total current assets
Property and equipment, net
Other assets
Excess costs over net assets acquired, net
Total assets
Liabilities and stockholders’ equity
Current liabilities
Notes payable
Long-term debt due within one year
Accounts payable
Accrued expenses
Total current liabilities
Long-term debt
Deferred income taxes
Stockholders’ equity
Common stock, $2 par value
Capital in excess of par value
Unrealized gain on investments
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$67,254
254,282
190,970
493,463
124,305
$15,073
143,132
165,873
336,690
116,792
125,917
903,477
—
1,130,274
290,252
121,031
142,925
$1,457,685
400,686
72,632
344,160
$1,947,752
$72,257
706
125,464
142,241
340,668
$210,000
167,486
535,982
46,287
547,344
45,365
121,354
240,871
4169
168,354
534,748
119,722
242,346
5228
237,806
605,102
$1,457,685
$1,947,752
193,799
178,656
749,941
220
P.M. Clikerñan 1 J. of Acc. Ed 23 (2005) 215—231
Exhibit 5
Heilig—Meyers company consolidated statements.of operations (ampqnts in thousands except per share data)
Fiscal Year ended February 29/28
‘
Reuenues
Sales
Other income
Total revenues
i
2000
‘
‘ 1999
1998
$2,038,143
259,509
2,297,652
$2,431,152
295,206
2,726,358
$2,160,223
309,513
2,469,736
1,346,503
762,176
62,997
99,283
1,637,901
907,913
75,676
107,916
2,270,959
2,729,406
1,451,560
828,105
67,283
181,645
25,530
2,554,123
Loss on sale and write-dowii of assets held for sale
Loss before provision (benefit) for income taxes
Provision (benefit) for income taxes
Net loss
(63,052) ‘
(36,359)
22,284
$(58,643)
(3048)
(1081)
$(1967)
(84,387)
(29,244)
$(55,143)
Net loss per share
Basic
Diluted
$(0.97)
$(0.97)
$(0.03)
$(0.03)
S(0.98)
$(0.98)
Costs and expenses
Costs of sales
Selling, general and administrative
Interest, net
Provision for doubtful accounts
Store closing and other charges
Total costs and expenses
4: What additional information, not presented in the case, should the auditors have considered when evaluating Heilig—Meyers’ ability to continue as a going concern?
2.4. Part two requirements
In order to prevail in a lawsuit under Rule 10(b)(5) of the Securities Exchange
Act of 1934 (the “1934 Act”), a plaintiff must demonstrate that: (1) a defendant
made a false statement or omitted making a statement of material fact; (2) with
scienter; (3) upon which the plaintiffjustifiably relied; and (4) that proximately
caused the plaintiffs damages. Pre- pare brief written answers to the following
questions.
1. The plaintiffs alleged that D&T’s audit report falsely stated that Heilig—
Meyers’ finan- cial statements complied with GAAP. Based on the
information in Part Two, do you think Heilig—Meyers’ February 29, 2000
financial statements were materially misstated? Why or why not?
2. D&T asked the judge to dismiss all seven plaintiffs’ claims on the basis that
their com- plaint failed to demonstrate that D&T acted with scienter. Explain
why you think the judge denied D&T’s motion for dismissal.
3. Assuming it could be proven that D&T’s audit report was false and
misleading, did the auditors cause damage to the six plaintiffs who purchased
all their shares before May 30, 2000? Why or why not?
4. Do you think D&T should have been held liable for losses suffered by the
plaintiff who purchased 440,000 shares after reading Heilig—Meyers’ fiscal
2000 annual report? Why or why not?