By Professor Zivia Sweeney

SHALL I TELL

By Professor Zivia Sweeney

Belinda Nemo, CPA, recently joined her company FSC, Inc. (FSC), a private corporation, as Assistant Controller after a several year stint at a Big Four public accounting firm in Assurance Services. She is a member in good standing of the state CPA society and the AICPA. Belinda left the firm to join her current employer because of unique career opportunities offered to her and her husband’s job transfer to the city in which her new company is located. Belinda was interviewed extensively for her position by several members of the executive management team including the Chief Executive Officer, (CEO), Chief Operations Officer (COO), Chief Financial Officer (CFO), and the Controller. They all informed her about the perceived need to upgrade the staff in the accounting department with another CPA possessing a background such as hers. The only CPA in FSC prior to Belinda coming on board was the Controller. During the onsite interview, Belinda also had the opportunity to meet and converse with key members of the accounting department staff. She entertained two other external employment offers as well as the opportunity to remain with her accounting firm. After careful consideration, Belinda opted to join FSC. In accordance with company policy, Belinda will be on probation for the first six months of her employment. See Attachment 1: Human Resources Policy Probation Period.

As Assistant Controller, Belinda’s key job functions are to a) review and sign off on select external audit schedules and reconciliations, b) ensure internal controls are in place and being adhered to, and c) to prepare the company for due diligence by a prospective buyer. This last duty is considered the most critical of her responsibilities. Belinda did not know FSC was for sale and was not made aware of specific job duties related to due diligence until after she joined the company as an employee. These duties include:

· Working with legal counsel on drafting a non-disclosure agreement

· Reconciling due diligence financial projections to actual results

· Preparing requested pro forma financial statements

· Working with the investment banking team to determine fair asset values

· Researching potential accounting and tax issues that could arise from the transaction

· Preparation of bi-weekly Board of Director update memorandums

While surprised, Belinda decided to stay with FSC once she was given an employment contract containing a sizeable severance (equal to five years’ salary and benefits) if the buyout is successful. There is a strong possibility she may be retained as a consultant by the new owner if the deal is consummated. This is due to the fact the CEO, CFO, and Controller have adamantly indicated they have no desire to remain with the company after it is sold to the new owner.

Belinda is one of two new departmental employees and the only CPA hired. Mike, the other employee hired as an Accounting Manager, oversees the month end closing process, account reconciliations, and production of FSC financial statements. He is also responsible for the initial preparation of all audit schedules. Mike was brought in to replace the individual supervising these functions who recently retired. In addition, Mike is a very close personal friend of the Controller. The other members of the accounting department are long term employees who received their accounting training through employment experience and classes taken at local community colleges. Belinda really likes the accounting department staff.

Belinda’s tenure with the company begins only two months before the commencement of the company’s year-end audit preparation. She starts working on due diligence preparation the first day of her employment. The potential buyer’s due diligence team will begin its work once the external audit is completed.

Due Diligence Work

A vast amount of Belinda’s time is spent on due diligence preparation. She was quite surprised to find that very little had been done prior to her joining FSC other than a “due diligence white paper” for executive management and the Board as an educational tool (see Attachment 2). Belinda utilizes the due diligence checklist provided by the perspective buyer to aid her in her efforts (Attachment 3). Most of the due diligence work Belinda has undertaken has gone well with minimum problems.

Board of Directors

The Board of Directors has been in place for several years. Its chair and vice-chair are the FSC, Inc. CEO and CFO respectively. There are four committees-executive, compensation, personnel, and audit. The audit committee’s primary role is to hire the external auditors and address accounting matters as they arise. All five members of the audit committee are from external companies. The chair of the audit committee is an executive of the investment banking firm that has been engaged to represent FSC broker the sale of the company. Most of the key decisions regarding the organization are made by the executive committee which is comprised of the CEO, CFO, the investment banking executive, and two other external members.

Audit Firm

FSC, Inc. is audited by a small regional firm which has been its auditor for the past ten years. It specializes in auditing companies in FSC’s industry. The average tenure at the firm of its audit staff is about four years. Each staff assigned to the FSC audit each has at least one year’s experience on the FSC audit engagement. FSC reports on a calendar fiscal year end. The upcoming audit is slated to take about seven weeks.

Audit Concerns

Once she commences to work on the year-end audit, Belinda becomes rather concerned. While there are accounting policies and procedures in place, Belinda quickly learns shortcuts are sometimes taken in order to ensure the books are closed on a timely basis, to quickly adhere to requests from senior executives, and to expedite external reporting to third party stakeholders. Furthermore, Mike gives her schedules for the audit to review with minimal supporting documentation. When she asks to see the documentation, she is told in many instances to rely on his representations. Belinda discusses these circumstances with the Controller who instructs her not to worry. After all, the shortcuts noted did not result in financial fraud or misstatement and FSC, Inc. has always received unqualified audit opinions. She assures Belinda the required documentation will be made available for the auditors when the time comes. Belinda is advised to learn to trust her colleague’s professionalism and to work to keep the due diligence process progressing.

Belinda begins to question herself and her misgivings after this meeting. She discusses the situation with her husband who tells Belinda her training in public accounting may be making her more paranoid given this is her first job in a private company outside of the public accounting arena. He assures her he believes everything will be fine once she gets through her first audit at the company and the due diligence review is completed. For a while, she begins to mentally make excuses for what is disturbing to her. They include:

1. “I need to get to know Mike and the Controller better and understand how they do things”.

2. “I do not need to see everything because I am no longer an auditor but an Assistant Controller in industry”.

3. “The company is not motivated to do anything fiscally irresponsible given the possibility of the pending sale”.

4. “If I am wrong, I may be shooting myself in the foot and jeopardizing my lucrative buyout if the company is sold”.

But mental excuses are not enough. As the time grows closer for the external audit, Belinda is slowly becoming more alarmed. The Controller and Mike have certain meetings about the financial statements and year-end results without her. The excuse is that no one wants to distract from her due diligence duties. Based upon her pro forma financial analysis, Belinda suspects that all the expenses and liabilities of the organization are not being recorded and there is something very amiss with payroll. The aging analysis calculation appears to be overly optimistic given historical results. When Belinda makes inquiries of the accounting staff or requests access to key internal accounting reports to address her uneasiness, she is told to speak directly with Mike. She cannot get comfort on the validity of numbers with the limited information provided to put these suspicions to rest absent more supporting documentation and internal reports.

Again she broaches the Controller with her concerns. The Controller becomes agitated and orders her to accept the schedules from her colleague and to stop complaining. Belinda, stunned by this response, makes an appointment to see the CFO given the organization’s open door policy with its executives. The CFO, while sympathetic, informs Belinda this is a matter that must be worked out between her and her boss. He makes it clear he stands by any and all accounting decisions that the Controller makes as the chief accounting officer of the organization.

The Controller is not pleased when she is apprised Belinda went over her head to the CFO about her trepidations. She calls Belinda into her office for a meeting. The Controller tells Belinda she wants her to concentrate on the due diligence work as it was probably an incorrect decision by management to overburden her with audit related responsibilities. Moreover, Belinda is instructed to request information directly from the Controller when required to support her pro forma financial projections and not to bother Mike. Feeling embarrassed, Belinda apologizes and does as she is told.

Once Belinda commences to receive requested information from the Controller, her suspicions and fears continue to mount. Given projected actual results, the pro forma information she has been preparing does not make sense for several reasons. Those reasons include:

· Numerous new customers who have yet to pay on their accounts which is adversely impacting the aging analysis and cash projections

· A dramatic drop in operating expenses with no plausible explanation being provided

· A suspicion that the recent monthly financial statements are being prepared on a combination of accrual and cash basis even though the company is on an accrual basis method.

Belinda revises the estimates and updates her due diligence work to incorporate her findings. She again shares the revised documentation and her latest concerns with the Controller. The Controller indicates that the projections of future earnings and cash flow are too low and she would like the earlier versions of the projections to be used. It also comes to light the Controller is troubled that Belinda is disclosing too much information in certain of the due diligence documents especially as it relates to financial projection assumptions, litigation, environmental issues, and collections from customers. Her suggestion is to have the external due diligence team ask for information rather than volunteer it. When Belinda starts to ask the logic behind this line of thought, the Controller tells her in no uncertain terms she will do as she is told because is new to the company and does not know everything. The Controller orders Belinda not to discuss any of her apprehensions with anyone including the external auditors and the incoming due diligence team absent permission from her. Otherwise, Belinda will be considered insubordinate and failing to follow instructions. She is informed the entire executive management team, especially the CFO, believes her “hysteria” will damage its efforts to sell the company. Belinda leaves the meeting feeling the tone of the conversation was little more than a veiled threat of being terminated.

Belinda is in a quandary as to what to do. She likes her position with the company and relishes the payout she may receive if the company is sold. But Belinda can’t shake the feeling she is being forced to act in an unethical manner. She reviews the company’s policies regarding reporting financial irregularities and notes all such matters should be reported to the audit committee under FSC’s whistleblower policy. See Attachment 4. However, she knows the chair of the committee is very close friends with the CEO and CFO in addition to being involved with the potential sale. Belinda contacts the ethics unit of her professional organizations as to what to do. She is referred to review certain sections of the code of professional ethics. (See Attachment 5)

Questions

1. Is Belinda being paranoid and imaging things?

2. Does the possibility exist that she is having difficulty making the transition from public accounting to industry?

3. Should Belinda follow the Controller’s suggestion to change the projections and to keep quiet about her concerns?

4. Is there a possibility that Belinda is being wrong and there is nothing amiss? Why or why not?

5. What could possibly occur if Belinda does disclose factual information to a third party if asked to do so by that party? Can she not answer?

6. Does the company have a legitimate reason to terminate Belinda if she continues to insist that something is wrong with the company’s financial statements and projections?

7. Is Belinda a whistleblower or an incompetent employee?

8. What should Belinda ultimately do?

ATTACHMENT 1

HUMAN RESOURCES POLICY 130-13: PROBATIONARY PERIOD

All new employees are subject to a probationary period that begins on the first day of employment and ends on the last day of the sixth month of employment.

Probationary Period: Definition

The probationary period is defined as the initial period of employment during which a supervisor determines whether the employee is able to meet the standards and expectations of the job and if the employee should be retained as a full time employee. It is intended to be used to determine whether the right employee has been hired for the position. An employee's performance and adherence to FSC policies and procedures are to be closely monitored. The employee will be counseled and corrective action will be taken when necessary as an ongoing part of this new employment period. During the probationary period, the supervisor appraises the employee’s: