CASE 2.3
HAPPINESS EXPRESS, INC.
Synopsis
In 1989, two longtime sales reps in the toy industry, Joseph and Isaac Sutton, founded
Happiness Express, Inc. The business model developed by the Sutton brothers involved acquiring
company’s 1995 fiscal year as children’s interest in the enigmatic crusaders subsided. To sustain
their company’s impressive profit and revenue trends, Happiness Express booked several million
dollars of fictitious sales and accounts receivable near the end of fiscal 1995. (Ironically, the
fraudulent scheme resulted in Happiness Express being named the fi#1 Hot Growth Company” in the
United States by Business Week.)
Public allegations of insider trading involving Happiness Express’s executives and hints of
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Happiness Express, Inc.—Key Facts
110 Case 2.3 Happiness Express, Inc.
1. In 1989, Joseph and Isaac Sutton founded Happiness Express, Inc., a small toy company that
marketed licensed merchandise featuring popular children’s characters.
3. Happiness Express was heavily dependent on the continued popularity of certain children’s
4. Happiness Express began experiencing financial problems during the spring of 1995 when sales
of its Power Rangers merchandise began falling sharply.
6. When the fraudulent scheme was uncovered, Happiness Express’s stockholders filed a class–
7. The primary focus of the lawsuit was on the audit procedures that Coopers & Lybrand had
applied to Happiness Express’s sales and year-end receivables for fiscal 1995.
8. Plaintiff attorneys argued that Coopers & Lybrand had overlooked key red flags regarding
9. Coopers & Lybrand was also charged with recklessly performing year-end sales cutoff tests and
Instructional Objectives
Case 2.3 Happiness Express, Inc. 111
1. To make students aware of the need for auditors to identify the unique or atypical audit risks
posed by specific industries and client business models.
3. To demonstrate the need for auditors to thoroughly investigate large and/or suspicious year-end
transactions recorded by a client.
Suggestions for Use
Consider using this case to illustrate the audit objectives related to accounts receivable and sales
as well as the audit procedures that can be used to accomplish those objectives. In particular, this
case can be used to provide your students with a solid understanding of the nature and purpose of
year-end sales cutoff tests and accounts receivable confirmation procedures. Another important
Suggested Solutions to Case Questions
1. “Existence” and fivaluation” are the primary management assertions that auditors hope to
corroborate when confirming a client’s accounts receivable. Confirmation procedures are
particularly useful for supporting the existence assertion. A client’s customer may readily confirm
that a certain amount is owed to the client (existence assertion); however, whether that customer is
willing and/or able to pay the given amount (valuation assertion) is another issue.
112 Case 2.3 Happiness Express, Inc.
2. I would suggest that Coopers & Lybrand made three mistakes or errors in judgment vis-a-vis the
Wow Wee confirmation. First, from the facts reported in the legal transcript used to prepare this
case, the auditors effectively allowed Goldberg to take control of the confirmation process for the
Wow Wee account. Throughout the confirmation process, auditors should maintain control over the
confirmation requests and responses to minimize the risk that client personnel will attempt to
Following are definitions/descriptions that I have found very useful in helping students
distinguish among the three key types of auditor misconduct. These definitions were taken from the
following source: D.M. Guy, C.W. Alderman, and A.J. Winters, Auditing, Fifth Edition (San
Diego: Dryden, 1999), 85-86.
Negligence. “The failure of the CPA to perform or report on an engagement with the
due professional care and competence of a prudent auditor.” Example: An auditor
fails to test a client’s reconciliation of the general ledger controlling account for
Case 2.3 Happiness Express, Inc. 113
financial statements.
I do not have access to all of the facts pertinent to this case since it never went to trial. As a
3. Given the size of the West Coast receivable—it represented approximately 13% of Happiness
Express’s year–end accounts receivable, which, in turn accounted for 32% of the company’s total
assets—it certainly seems reasonable to conclude that the account should have been confirmed.
Since this case never went to trial, Coopers & Lybrand did not have an opportunity to give a full
4. Examination of subsequent cash receipts and inspection of shipping documents are the two most
common fialternative” procedures auditors apply when a confirmation cannot be obtained for a large
receivable. Another alternative procedure in such circumstances is simply to sit down with
5. You will not find a reference to fiinsider trading” in the topical index to the professional auditing
standards. Nevertheless, insider trading is clearly an fiillegal act” that may have significant
implications for a client and significant implications for the client’s independent audit firm. AU
Section 317 discusses at length auditors’ responsibilities regarding illegal acts perpetrated by a
client. AU 317.05 notes that auditors’ responsibilities for illegal acts that have a direct and material
114 Case 2.3 Happiness Express, Inc.