CASE 2.2
GOLDEN BEAR GOLF, INC.
Synopsis
According to one sports announcer, Jack Nicklaus became “a legend in his spare time.”
Nicklaus still ranks as the best golfer of all time in the minds of most pasture pool aficionados—
granted, he may lose that title soon if Tiger Woods continues his onslaught on golfing records.
Despite his prowess on the golf course, Nicklaus has had an up and down career in the business
world. In 1996, Nicklaus spun off a division of his privately-owned company to create Golden Bear
Golf, Inc., a public company whose primary line of business was the construction of golf courses.
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Case 2.2 Golden Bear Golf, Inc. 127
Golden Bear Golf, Inc.—Key Facts
1. Jack Nicklaus has had a long and incredibly successful career as a professional golfer, which
was capped off by him being named the Player of the Century.
2. Like many professional athletes, Nicklaus became involved in a wide range of business interests
related to his sport.
3. In the mid-1980s, Nicklaus’s private company, Golden Bear International (GBI), was on the
5. Paragon International, the Golden Bear subsidiary responsible for the company’s golf course
construction business, quickly signed more than one dozen contracts to build golf courses.
7. Rather than admit their mistakes, Paragon’s top executives chose to misrepresent the
subsidiary’s operating results by misapplying the percentage–of-completion accounting method.
8. In 1998, the fraudulent scheme was discovered, which resulted in a restatement of Golden
9. The SEC charged the Andersen auditors with committing several “audit failures,” primary
10. The Andersen partner who served as Golden Bear’s audit engagement partner was suspended
from practicing before the SEC for one year.
128 Case 2.2 Golden Bear Golf, Inc.
Instructional Objectives
2. To demonstrate that management representations is a weak form of audit evidence.
3. To examine audit risks posed by the percentage-of-completion accounting method.
Suggestions for Use
Many, if not most, of your students will be very familiar with Jack Nicklaus and his sterling
professional golf career, which should heighten their interest in this case. One of the most important
learning points in this case is that auditors must always retain their professional skepticism.
Encourage your students to place themselves in Michael Sullivan’s position. Sullivan had just
acquired a new audit client, the major stockholder of which was one of the true superstars of the
Suggested Solutions to Case Questions
1. Notes: I have not attempted to identify every management assertion relevant to Paragon’s
construction projects. Instead, this suggested solution lists what I believe were several key
management assertions for those projects. When auditing long-term construction projects for which
the percentage-of-completion accounting method is being used, the critical audit issue is whether the
client’s estimated stages of completion for its projects are reliable. As a result, most of the following
audit issues that I raise regarding Paragon’s projects relate directly or indirectly to that issue. In this
Case 2.2 Golden Bear Golf, Inc. 129
assertion that refers to whether specific assets or liabilities exist at a given date. “Occurrence,” on
the other hand, is a “transaction–related” assertion that refers to whether a given transaction or class
of transactions actually took place. On the Golden Bear audits, these two assertions were
intertwined. The existence assertion pertained to the unbilled receivables, while the occurrence
•Valuation (and allocation): This account balance assertion relates to whether “assets, liabilities, and
equity interests are included in the financial statements at appropriate amounts” and whether “any
resulting valuation or allocation adjustments are appropriately recorded” (AU-C 315.A114). This
assertion was relevant to the unbilled receivables that Paragon recorded on its construction projects
and was obviously closely linked to the existence assertion for those receivables. Again, any audit
construction projects. To test this assertion, the Andersen auditors could have attempted to confirm
some of the individual amounts included in the $4 million figure with Paragon’s vendors.
•Classification and understandability: This presentation and disclosure-related assertion was
relevant to the change that Paragon made from the cost–to-cost to the earned value approach to
applying the percentage-of-completion accounting method. By not disclosing the change that was
made in applying the percentage-of-completion accounting method, Golden Bear and Paragon’s
management were making an assertion to the effect that the change was not required to be disclosed
130 Case 2.2 Golden Bear Golf, Inc.
2. The term “audit failure” is not expressly defined in the professional literature. Apparently, the
SEC has never defined that term either. One seemingly reasonable way to define “audit failure”
would be “the failure of an auditor to comply with one or more generally accepted auditing
standards.” A more general and legal definition of “audit failure” would be “the failure to do what a
prudent practitioner would have done in similar circumstances.” The latter principle is commonly
3. Most likely, Andersen defined a “high–risk” audit engagement as one on which there was higher
than normal risk of intentional or unintentional misrepresentations in the given client’s financial
statements. I would suggest that the ultimate responsibility of an audit team is the same on both a
4. “Yes,” auditors do have a responsibility to refer to any relevant AICPA Audit and Accounting
Guide when planning and carrying out an audit under the auspices of the AICPA Professional
5. The following footnote was included in Accounting and Auditing Enforcement Release No. 1676,
which was a primary source for the development of this case. “Regardless of whether the adoption
of the ‘earned value’ method was considered a change in accounting principle or a change in
Case 2.2 Golden Bear Golf, Inc. 131
accounting estimate, disclosure by the company in its second quarter 1997 interim financial
statements and its 1997 annual financial statements was required to comply with GAAP.” In the text
of the enforcement release, the SEC referred to the switch from the cost-to-cost method to the earned
value method as a change in “accounting methodology,” which seems to suggest that the SEC was
accounting method was a “change in accounting principle.”
Under SFAS No. 154, a change in accounting principle “shall be reported by retrospective
application unless it is impracticable to determine either the cumulative effect or the period-specific
effects of the change.” This is an important difference with the prior standard, APB No. 20, that
required a “cumulative effect of a change in accounting principle” to be reported by the given entity
in its income statement for the period in which the change was made. SFAS No. 154 requires that a
change in accounting estimate “shall be accounted for in the (a) period of change if the change
affects that period only or (b) the period of change and future periods if the change affects both.”