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
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Golden Bear Golf, Inc.—Key Facts
104 Case 2.2 Golden Bear Golf, Inc.
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.
3. In the mid-1980s, Nicklaus’s private company, Golden Bear International (GBI), was on the
4. In 1996, Nicklaus decided to “spin off” a part of GBI to create a publicly owned company,
Golden Bear Golf, Inc., whose primary line of business would be the construction of golf courses.
6. Paragon incurred large losses on many of the golf course construction projects because the
subsidiary’s management team underestimated the cost of completing those projects.
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
Instructional Objectives
Case 2.2 Golden Bear Golf, Inc. 105
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
Suggested Solutions to Case Questions
1. Note: 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. Additional note: 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.
►Existence/occurrence: In SAS No. 106, “existence” is an “account balance–related” assertion that
106 Case 2.2 Golden Bear Golf, Inc.
►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 Section 326.15).
►Occurrence: The occurrence assertion was extremely relevant to the $4 million of uninvoiced
construction costs that Paragon recorded as an adjusting entry at the end of fiscal 1997. The
uninvoiced construction costs allowed Paragon to justify booking a large amount of revenue on its
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
►Completeness: Although not addressed explicitly in the case, the SEC also briefly criticized
Andersen for not attempting to determine whether Paragon’s total estimated costs for its individual
construction projects were reasonable, that is, “complete.” To corroborate the completeness
assertion for the estimated total construction costs, Andersen could have discussed this matter with
Case 2.2 Golden Bear Golf, Inc. 107
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
Guides when planning and carrying out an audit. These guides do not replace the authoritative
guidance included in Statements on Auditing Standards but rather include “recommendations on the
application of SASs in specific circumstances.” Following is an excerpt from the prologue of one
108 Case 2.2 Golden Bear Golf, Inc.
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
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
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