WELCOME

TO
OUR PRESENTATION
 Presenting By
Group -06
Associates:
 Md. Sagir Hossain (21AIS 010)
 Md. Rejaul karim (21AIS 029)
 Sujan Miah (21AIS 031)
 Md. Abu Easha (21AIS 034)
 Md. Rakibul Hasan (21AIS 049)
Star Technologies
Incorporation: A Case Study
 Part:01
Presenting By:
Md. Sagir Hossain
ID NO: 21 AIS 010
Overview of Star Technology Incorporation.

 Company background
 History
 Going Public
 Post IPO growth
 Product portfolio
Overview of Star Technology
Incorporation.
 Star Technologies Inc.
 Founded in 1981, went public in 1984
 Virginia-based computer manufacturer
 Dynamic high-tech industry, specialized in
super computers.
 Targeted highly specialized uses like
military surveillance and petroleum
exploration
Overview of Star Technology
Incorporation.

 Vision and Mission

 Vision:
To revolutionize the computer industry with innovative
solutions
 Mission:
To provide cutting- edge technology products and
service to empower businesses
Overview of Star Technology
Incorporation.
Strengths and Core Competencies
 Technological expertise and innovation
 Strong research and development
capabilities
 Experienced and skilled workforce
 Strong customer relationships and
satisfaction
Overview of Star Technology
Incorporation.
 Challenged faced :
 Economic fluctuations in the high-tech
industry
 Volatile operating result and financial
instability
Strategies implemented:
 Diversification of product portfolio
 Market research and analysis
 Financial planning and risk management
 Continuous innovation and R&D investment
Continuing….
 Results achieved :
 Improved financial stability and profitability
 Expended customer base and market risk
 Enhance competitiveness and market positioning.
 Future outlook:
 Adaptation and emerging technologies and market
trends
 Sustainable growth and market leadership
 Continued focus on innovation and R&D.
Continuing….
 Intense Competition:
 Competitors entering the supercomputer
market pricing pressures
 Struggle to differentiate Star’s offerings
 Part:02
Presenting By:
Sujan Miah
ID NO: 21 AIS 031
Overview Of the case
Key Facts

 Title: Star Technologies Incorporation.

 In the 1980s, Star Technologies had several Operating problems.

 Star Technologies faced financial challenges and audit issues.

 End of fiscal 1989: facing a financial Crisis.

 Many contentious issues occurred with the client in the 1989 audit.

 Engagement partner Clark Childers and audit manager Paul Argy

repeatedly clashed.
Contentious Issues During The 1989 Audit

 R&D Expenditure Disagreement

 Advance of nearly $ 900,000 made to culler &

associate in 1989 classified as note receivable due
in 10 years .
 Culler fundamentally unable to repay :
 No other sources of revenue
 Star was its only customer
Inventory Obsolescence Reserve
Disagreement
 Argy thought obsolete computers with net
book value of 2 million should have been
written down to $ 500,000.
 Childers agreed to an arbitrary reserve
increased of $ 350,000.
 Client had no documented basis or rationale
therefore .
Reserve for Bad Debts Disagreement

 Two large outstanding receivables in

litigation.
 Proposed increase in allowance for doubtful
accounts by $400,000.
 Client resisted and offered a modest increase
of $65,000.
 Basis for the adjustment was insufficient.
“Mystery ”Assets Disagreement
 “Assets in Process” ; account with no
supporting documentation.
 Disagreements on valuation and write-off.
 Compromise to record $100,000
depreciation expense and write off the
remaining cost over four years.
 Notes Payable Classification
Disagreement
 Debt covenant violations with the principal bank.
 Disagreement on the classification of the loan as
a long-term liability.
 Bank waiver obtained, but insufficient according
to audit senior.
 Unqualified audit opinion issued before full
resolution.
Part:03

Presenting By:
Md. Abu Easha
ID NO: 21 AIS 034
 Topics:

 Financial Analysis.
 Audit issues and resolutions.
 Accounting issues faced by the company.
 The key factors that contributed to its
decline.
 Some key consequences that resulted from
the company & collapse.
Financial Analysis

Revenue:

 In 1985, Star Technologies reported revenues of $21.2 million,

accompanied by a net loss of over $8 million.
 The following year, the financial performance worsened, with
revenues declining and the net loss likely exceeding the previous year.
 In 1987, Star Technologies experienced a significant increase in
revenues, reaching $44 million, resulting in an after-tax profit of $1.4
million.
 However, the positive trend reversed in 1989, as revenues decreased
to $39 million, leading to a loss of $4.4 million.
 Audit Issues and Resolutions:
1. R&D Expenditures: Misleading description of the
agreement with Culler, lack of adjustment proposed during
the audit.
2. Obsolescence: Questionable valuation and compromise on
write-downs.
3. Reserve for Bad Debts: Insufficient basis for accepting a
modest increase in the allowance account.
4. "Mystery" Assets: Disputed existence and inadequate
documentation.
5. Classification of Notes Payable: Disagreement on the
long-term liability classification based on abank waiver.
Accounting issues faced by the
company
 Net Losses and Volatile Operating Results: Star Technologies face
1980s fluctuation, experiencing net los and profit, and later managed to
generate profits in 1987.

 Rapid Technological Obsolescence: Star Technologies invested 20%

in R&D in 1989, but industry changes made many products obsolete.
 Violation of Debt Covenants: Star poor operating results in 1989
caused the company to breach several covenants of a lending agreement
with its principal bank, which had extended a $5.8 million long-term
loan. As a result, the maturity date of the loan was accelerated, making
it immediately due and payable by the end of fiscal 1989.
The key factors that contributed to it’s
decline
 Vicious cycle of operating results: Star Technologies faced volatile revenues and
profits due to changing technology landscape and short product life cycles in the
competitive computer industry.

 Rapid technological changes : Star Technologies allocates 20% of revenues to R&D,

but rapid technological changes made many products obsolete, causing financial strain
on the company.

 Decline in sales : Star experienced a decline in sales, especially in its petroleum

exploration product, dueto technological changes and slowdowns, resulting in a
significant shortfall compared to forecasts.

 Audit failure and restated financial statements : Price Waterhouse withdrew audit
opinion on Star's 1989 financial statements due to inadequate audit, citing anonymous.
Some key consequences that resulted
from the company's collapse

 Financial Losses: 1989 Star Technologies financial crisis resulted

in $5.8 million loan due, causing significant losses for
shareholders.
 Violation of Lending Agreement: 1989 Star's poor financial
performance led to covenant violations, accelerating loan maturity
and contributing to its collapse.
 Job Losses and Economic Impact: Star Technologies collapse
caused job losses and localized economic impact, impacting
Virginia-based computer manufacturer and community.
 Industry Implications: Star's collapse highlighted competitive
computer industry challenges, highlighting adaptability and short
product life cycles.
Part:04

Presenting By:
Md. Rakibul Hasan
ID NO: 21 AIS 049
 Findings
 Star Technologies' performance varied significantly in the 1980s.
 Rapid technology changes rendered Star's products obsolete,
necessitating repeated R&D investments.
 Star Technologies faced a financial crisis in 1989 due to poor
operating results and a decline in revenues.
 Company's R&D expenditures accounted for 20% of 1989
revenues.
 Price Waterhouse audited Star's financial statements in late
1980s, addressing management issues, loan classification,
inventory reserves, and R&D capitalization.
 Recommendations

 Enhance R&D strategy: Star Technologies should invest in sustainable

growth technologies for longer life cycles.

 Strengthen financial management: Star needs improved financial

management practices for accuracy, transparency, and decision-making.

 Diversify product portfolio: Star should diversify its product portfolio to

avoid technological obsolescence and market fluctuations.

 Strengthen relationship with auditors: Star Technologies should

collaborate with auditors for accurate information and Compliance.
 Consequences
 Price Waterhouse recalled the opinion and
issued restated financial statements.
 SEC investigation resulted in sanctions
against Star and audit team members.
 Paul Argy: 18-month suspension.
 Clark Childers: Five-year suspension.
 Star's financial condition worsened over
time, shifting focus to software
development.
 Conclusion
 Star Technologies faced financial challenges
and audit issues.
 Contentious issues included R&D expenditures,
obsolescence, reserves, and classification.
 Price Waterhouse withdrew the audit opinion
and issued restated financial statements.
 SEC imposed sanctions on Star and audit team
members.
 Star's financial condition continued to
deteriorate.
 Case questions

Question 01: Explain why "industry knowledge" is so important to an audit

engagement team. Identify risk factors commonly posed by companies in
high-tech industries.
Answer :
Auditors must understand business, organization, and operating
characteristics, considering economic conditions and industry trends, as
industry-related factors impact financial health and future company growth.
Listed next are examples of audit risk factors:
 High risk of inventory obsolescence.
 Liquidity concerns stemming from the need for large amounts of capital to
finance.
 Product development, production, and marketing efforts.
 Case questions
Question 02:
Review Star Technologies' financial statements included in Exhibits
2 and 3. What changes in Star's financial status between fiscal
year-end 1988 and 1989 should have been of concern to the
company's independent auditors? How should these changes have
affected key audit planning decisions for the 1989 Star audit?
Answer :
Star's financial statements show significant liquidity deterioration,
increased leverage, and a decline in profitability between 1988 and
1989. Auditor Price Waterhouse should have questioned Star's
going concern status, focusing on key management assertions,
discussing financial problems with executives, and examining debt
agreements, board meetings, and legal matters.
 Case questions

Question 03:
Review Star's statements of cash flows shown in
Exhibit 3. What information can auditors obtain
from a client's cash-flow data that is relevant to the
audit plan developed for the client?
Answer:
Cash flow statements reveal a company's financial
health, indicating operating activities and potential
debt and equity capital raising.
 Case questions

Question 04:
Refer to SAS No. 31, "Evidential Matter." What
management assertions did Star violate in its original 1989
financial statements? Explain.
Answer:
Star's 1989 financial statements violated key management
assertions, including $900,000 note receivable from
Culler, inventory obsolescence reserve, bad debt reserve,
"mystery" assets, and proper classification of notes
payable.
 Case questions
Question 05:
Star's bank indicated in the waiver of the debt covenant
violations that it did not intend to accelerate the maturity
date of the $5.8 million loan. Was that statement a
sufficient basis for classifying the loan as a long-term
liability rather than as a current liability? Defend your
answer.
Answer :
The large loan was due and payable in five months, but
the waiver failed to convert it from a current to a long-
term liability. Star's bank should have accelerated the
loan's maturity date.
 Case questions
Question 06:
Briefly describe the nature and purpose of the audit
review process. Identify any breakdowns that occurred
in the audit review process during the 1989 Star Audit?
Answer:
The audit review process is crucial for independent
audits, involving staff accountants, engagement audit
managers, and partners to assess subordinates' work
and maintain consistency. However, a predisposition to
align with client positions can undermine its purpose.
 Case questions
Question 07:
How should disagreements between members of an audit
engagement team be resolved? What mistakes, if any,
were made by Childers and/or Argy in resolving the
conflicts that arose between them during the 1989 Star
audit?
Answer:
Common disagreements among audit engagement team
members require open discussion, senior members
taking responsibility, and audit partners asserting
authority, but unilateral decision-making undermines the
advantage of assigning an engagement team.