Campbell Soup Company Audit

Campbell Soup Company

Background

Campbell was founded shortly before the start of the Civil War. Abraham Anderson and Joseph Campbell began manufacturing canned vegetables and fruit preserves. In 1976, Campbell bought out Anderson’s interest and renamed the firm the Joseph Campbell Preserving Company. Later, Arthur Dorrance was Campbell’s new partner. In the early 1920s, John Dorrance, Arthur Dorrance’s nephew, was the sole owner of the Campbell Soup Company, which was the largest producer of canned soup products. Unfortunately, as the twentieth century was coming to a close, the nation’s appetite for condensed soup products was waning. The weakening demand prompted the company’s executives to use an assortment of questionable business practices and accounting schemes to enhance the company’s reported earnings.

Campbell stockholders filed a series of lawsuits in late 1990s. The alleged scams included trade loading, improper accounting for loading discounts, shipping to the yard, and guaranteed sales. The plaintiffs in the class-action lawsuit filed against Campbell Soup Company and its top executives eventually added Pricewaterhouse (PwC), Campbell’s independent auditor, as a defendant in the case.

To allow a lawsuit filed under the 1934 Security Act to proceed against a defendant, a federal judge must find that the plaintiffs have alleged or “pleaded” facts “to support a strong inference of scienter” on the part of that defendant. After completing the review of PwC’s audit workpapers, judge Irenas ruled that individually and collectively the plaintiff’s allegations did not provide a sufficient basis to justify including the accounting firm as a defendant.

Issue

In this case, there are four issues from w...

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...ccounting staff apparently never recorded appropriate reserves for those sales returns. The plaintiffs charged that PwC must have known about Campbell’s bogus sales, but the judge rejected this complaint. The reason was that PwC’s role as Campbell’s auditor is insufficient to permit an inference that PwC knew of these allegedly deceptive practice.

Summary

In addition to learning these four improper practices, as a plaintiff, if he or she intends to file a legal action against audit firms, evidences to charge them have to be sufficient. PwC’s auditors might be reckless, but they were not added as defendants. Most of the charges to Campbell were rejected by the judge just because plaintiffs could not provide sufficient evidence and specifically point out facts. Also, this case shows us a red flag about unusual increasing sales near the end of accounting period.