Campbell Soup Compan Audit

Campbell Soup Company

Background

Campbell was founded shortly before the start of the Civil War. Abraham Anderson and Joseph Campbell began manufacturing canned vegetables and fruit preserves. In 1976, Campbell bought out Anderson’s interest and renamed the firm the Joseph Campbell Preserving Company. Later, Arthur Dorrance was Campbell’s new partner. In the early 1920s, John Dorrance, Arthur Dorrance’s nephew, was the sole owner of the Campbell Soup Company, which was the largest producer of canned soup products. Unfortunately, as the twentieth century was coming to a close, the nation’s appetite for condensed soup products was waning. The weakening demand prompted the company’s executives to use an assortment of questionable business practices and accounting schemes to enhance the company’s reported earnings.

Campbell stockholders filed a series of lawsuits in late 1990s. The alleged scams included trade loading, improper accounting for loading discounts, shipping to the yard, and guaranteed sales. The plaintiffs in the class-action lawsuit filed against Campbell Soup Company and its top executives eventually added Pricewaterhouse (PwC), Campbell’s independent auditor, as a defendant in the case.

To allow a lawsuit filed under the 1934 Security Act to proceed against a defendant, a federal judge must find that the plaintiffs have alleged or “pleaded” facts “to support a strong inference of scienter” on the part of that defendant. After completing the review of PwC’s audit workpapers, judge Irenas ruled that individually and collectively the plaintiff’s allegations did not provide a sufficient basis to justify including the accounting firm as a defendant.

Issue

In this case, there are four issues from which we can learn how a company may use improper business practices to manipulate its reported operating results. These practices are trade loading, improper accounting for loading discounts, shipping to the yard, and guaranteed sales.

Trade Loading

Campbell offered sizable trade discounts near the end of accounting period to entice customers to make product purchases that they would otherwise defer. By this way, a company can use price concessions to prop up its reported revenues and profits. Plaintiffs pointed out that PwC auditors were aware of the excessive trade loading by their client and this should have been a “red flag” for PwC to investigate the possibility that their client was fraudulently misrepresenting its operating results. The judge agree with the plaintiffs that PwC’s workpapers revealed the firm was aware of Campbell’s disproportionately sales near the end of quarterly reporting periods. However, the he disagreed with the assertion that PwC should have considered those heavy sales a red flag. Instead, he pointed out that PwC’s workpapers referred to the large, period-ending sales as a “traditional” trend in Campbell’s operating results.

This “traditional” trend may apply to Campbell’s business environment, but may not to other industry. An auditor had better understand the industry environment he or she involves in to judge whether disproportionately sales near the end of quarterly reporting periods are normal or not.

Improper Accounting for Loading Discount

Whether PwC would remain a defendant was whether the audit firm realized that large trade discounts granted on period-ending sales were routinely recorded as SG&A expenses. During the 1997 audit, PwC learned that Campbell was booking some trade discounts as SG&A expenses and Campbell’s officials pledged that in the future Campbell would provide “proper accounting for nonperformance related discounts.” In fact, Campbell’s accounting staff did not fully implement those measures. However, the judge ruled that

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