POLISHAN’S DEFENSE: CONTROLS WERE THERE

Byline: Kate Fleisher

SCRANTON, Pa. — Defense attorneys for former Leslie Fay chief financial officer Paul Polishan sought to portray the company’s accounting practices as better managed than the “ineffective” picture described by internal company auditors when financial irregularities first came to light in 1992, as testimony continued in his trial here Tuesday.
Kenneth A. Hirsch, an auditor from BDO Seidman of Philadelphia, the external auditing firm for Leslie Fay from 1975 to 1998, returned to the stand for cross-examination Tuesday in the fraud trial.
Questioned by Timothy Polishan, who is both the defendant’s son and a member of his legal team, Hirsch described Leslie Fay as a company with no signs of significant financial irregularities during the time he spent as BDO’s engagement partner, responsible for Leslie Fay’s audits for 1990-91.
On a 1991 audit, BDO gave a bigger role to the garment maker’s internal auditing team, but only after BDO determined that the team’s work was “both competent and objective,” he said.
Hirsch said the internal auditing department, headed by company treasurer Dan Falkowitz, was helpful in such areas as account and inventory analysis and year-end tax calculations.
That opinion conflicts with the earlier testimony of Jonathan M. Hoff, an attorney formerly with Weil Gotshal & Menges, which had assisted Leslie Fay’s board audit committee with its investigation after the irregularities were discovered and said the firm’s internal auditing was ineffective.
Polishan then walked Hirsch through a series of completed “inherent risk” questionnaires in which BDO personnel attested to two dozen or more standard pre-audit concerns.
An example was a 1991 questionnaire which recorded no “risk of misstatement, because the degree of management involvement in day-to-day operations was too high” and no “undue emphasis on releasing or planning the amount of reported earnings and maintaining the market value of securities.” Nor did BDO personnel see any “unduly optimistic projections of earnings by management.”
Leslie Fay, Hirsch said, was “conservative” in its accounting practices; it had “strong internal controls in place,” and the company’s accounting strategies “remained substantially unchanged from year to year,” thus indicating continuity. Had there been no controls, he said, BDO would have withdrawn its association as external auditor.
Hirsch said he recalled only one audit adjustment and that reduced income by $834,000 in the company, which had a $900 million volume at that time.
“It was immaterial,” he testified, “and the client agreed to no adjustment to the financial statement.”
Asked about executive bonuses, based on earnings, Hirsch said BDO had no concern, based “on internal controls, and conservative accounting. We felt there was very low risk that earnings would be overstated.”
On Monday, the prosecution presented witnesses including the company’s former head of information systems and a former 26-year executive in the accounting department.
William J. Schlingman, of Plains, Penn., who joined Leslie Fay in 1966 as head of the accounts payable department and eventually was named vice president of sales and corporate cash manager in 1992, reporting to Polishan, described the cfo’s manner of “intimidation, harassment and belittling of people” before questions moved to Leslie Fay financial activities in his area of expertise.
Assistant U.S. Attorney Lorna Graham focused her questions on the company’s practice of three-day pre-billing and reserves, both covered extensively last week during the trial. Schlingman testified, “We started with the three-day rule. It got worse and worse and we were (eventually) up to the 10-day rule.”
He testified that he had concerns about a 1991 cash projection budget and told Polishan, who replied, “Don’t worry about it.”
Then Graham questioned him about reserves, the amount of money set aside to cover returned goods, advertising allowances and other pre-approved customer payments.
In February 1992, Schlingman said, testing reports showed reserve payments exceeded the budgeted amount by $1 million. He testified that Polishan told him “I want you to get rid of that.”
“He wanted me to change entries, and I wouldn’t charge them back on the accounts and I got fired two weeks later,” Schlingman said.
In cross examination, defense attorney Michael Berger asked Schlingman if the test results should have been disclosed in the normal course of business to BDO.
“They’d be observed, yes,” he said of the two opposing sets of reserves figures.

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