CASE 2.7
GEO SECURITIES, INC.
Synopsis
In the late 1990s, Geo Companies of North America (GNCA), a small Dallas-based
company, organized a wholly-owned subsidiary, Geo Securities, Inc., to market interests in oil and
gas properties that it owned or controlled. Since GNCA was not a public company, it was not
registered with the SEC. However, because Geo Securities was a registered broker-dealer, it was
required to file audited financial statements annually with the SEC.
From 2000 through 2005, Geo Securities was audited by Perkins, Dexter, Sinopoli & Hamm
(PDSH), a small CPA firm in the Dallas–Fort Worth Metroplex. The engagement partner for each of
those audits was Frank Sinopoli. Throughout Sinopoli’s tenure as Geo Securities’ audit engagement
Geo Securities failed to record a loss and offsetting liability for the arbitration award in its
financial statements for the year ended July 31, 2005, which was the fiscal year in which the
arbitration decision was handed down—the $1 million amount of the arbitration award was clearly
material to Geo Securities’ 2005 financial statements. In fact, Frank Sinopoli consulted with Geo
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Geo Securities, Inc.—Key Facts
132 Case 2.7 Geo Securities, Inc.
1. In 1996, Dallas-based Geo Companies of North America (GNCA) organized a wholly-owned
2. Neither GNCA nor Geo Securities was a public company; however, because Geo Securities
3. Frank Sinopoli, a partner with Perkins, Dexter, Sinopoli & Hamm (PDSH), supervised the
annual audits of Geo Securities from 2000 through 2005.
4. During the six-year period that Sinopoli served as Geo Securities’ audit engagement partner,
5. In 2004, the court awarded a nominal judgment to the plaintiffs in those civil lawsuits; a few
6. The arbitration ruling was issued during Geo Securities’ 2005 fiscal year; however, after
7. In 2009, the SEC ruled that Geo Securities’ 2005 financial statements were materially
9. Despite Geo Securities’ ongoing litigation problems, Sinopoli did not identify “litigation,
claims, and assessments” as an area of significant audit risk during the 2005 audit.
10. During the 2005 audit, Sinopoli also relied improperly, according to the SEC, on a
Instructional Objectives
Case 2.7 Geo Securities, Inc. 133
1. To identify key management assertions relevant to contingent liabilities.
3. To identify auditors’ responsibilities to examine and report on supplemental information
accompanying a client’s audited financial statements.
Suggestions for Use
Before discussing this case in class, consider requiring individual students or groups of students
to identify recent examples of major litigation cases involving public companies or other audited
1. Several of the management assertions discussed in SAS No. 106 are relevant to contingent
liabilities. The assertions that are arguably the most pertinent to contingent liabilities include the
following:
—Completeness (account balances): All transactions and events that should have been recorded have
2. AU Section 337, “Inquiry of a Client’s Lawyer Concerning Litigation, Claims and Assessments,”
discusses the responsibility of auditors to communicate with a client’s external legal counsel. AU
Section 337.05 points out that client management is the “primary source of information about”
litigation, claims, and assessments that may have a material impact on the client’s financial
134 Case 2.7 Geo Securities, Inc.
3. As a point of information, the rules regarding auditors’ association with “other information”
and “supplementary information” were modified by Statements on Auditing Standards No. 118-120,
which became effective for audits of financial statements for periods beginning on or after December
15, 2010.
AU Section 558, “Required Supplementary Information” [SAS No. 120], discusses auditors’
Case 2.7 Geo Securities, Inc. 135
AU 551.09 notes that the auditor can include the report on the given supplementary
information in an explanatory paragraph following his or her report on the given client’s financial
4. AU Section 341, “The Auditor’s Consideration of an Entity’s Ability to Continue as a Going
Concern,” is directly relevant to this question. On every audit engagement an auditor has a
“responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as
a going concern for a reasonable period of time, not to exceed one year beyond the date of the
financial statements being audited.”