Campbell Soup easily qualifies as one of the most recognizable brand names across the globe. Founded shortly before the start of the Civil War, Campbell Soup Company long had a reputation as having one of the most rigid corporate cultures in the United States. An unwritten but strictly enforced company dress code required Campbell executives and other management personnel to wear starched white shirts and conservative business suits. While hard at work in their offices on production budgets, sales forecasts, or new promotional campaigns, those executives and office managers were expected to maintain an air of formality and decorum by wearing their suit jackets. Even the company’s marketing department was known for its traditionalist views.

Nearly 100 years would pass before Campbell’s cautious marketing executives redesigned the company’s standard red and white label introduced in the early 1900s. By the late 1990s, Campbell’s stifling corporate culture had relaxed somewhat. This more easygoing mindset apparently extended to the company’s accounting and financial reporting practices. In early 2000, Campbell found itself snared in a contentious legal battle with a large contingent of its stockholders. The stockholders charged that accounting gimmicks applied by Campbell’s accounting staff had misrepresented the company’s reported operating results and had ultimately led to a sharp decline in the price of its common stock.

In 1860, Abraham Anderson organized a small canning business in Camden, New Jersey, located a few miles east of Philadelphia across the Delaware River. Several years later, Anderson took on a partner, Joseph Campbell, who sold produce in the communities surrounding Camden. The two men merged their business backgrounds to begin manufacturing canned vegetables and fruit preserves that they marketed in Philadelphia and southwestern New Jersey. When Anderson decided to leave the business in 1876, Campbell bought out his interest in the partnership and renamed the fi rm the Joseph Campbell Preserving Company. Campbell’s company struggled fi nancially until he found a well-heeled investor, Arthur Dorrance, to become his new partner. Several years later, Dorrance persuaded Campell to hire his nephew, John Dorrance, who was a chemist by training. The younger Dorrance would be responsible for the breakthrough event that catapulted the Camden-based business to the top of the prepared food market in the United States.

In 1899, John Dorrance came up with a cost-effective method of canning condensed soup. Within the span of a few months, condensed soup products replaced canned vegetables and preserves as the Campbell company’s primary product line. By the early 1920s, John Dorrance was the sole owner of the Campbell Soup Company, which easily reigned as the nation’s largest producer of canned soup products. More than eight decades later, Campbell still dominates the soup industry, maintaining a steady two-thirds market share within the industry. Likewise, the Dorrance family continues to control the now publicly owned company, thanks to the large block of Campbell common stock that John Dorrance’s descendants collectively own. Throughout most of the twentieth century, the conservative polices of Campbell’s management produced steady but not spectacular growth in revenues and profits for the blue chip company. Unlike most of its competitors, Campbell was slow to diversify its product offerings. A corporate policy requiring a new venture to earn a profit during its initial year of operation stymied most proposals to diversify the company’s short product line. In 1980, Campbell’s new management team surprised the business world by selling debt securities, the first time the company had raised funds by borrowing in the debt market. Even more startling was the company’s announcement that the borrowed funds would be used to finance an aggressive expansion program.

During the early and mid-1980s, Campbell’s new management team released more than 300 new products. The new product offerings doubled Campbell’s revenues over the next several years but their impact on the company’s bottom line was less than impressive. In fact, despite several billion dollars of sales in 1989, the company registered an anemic profit of only $4.4 million. Another overhaul of top management in 1990 resulted in a new company slogan, “Never Underestimate the Power of Soup,” that underscored a renewed focus by Campbell on its core product line. Campbell’s new management team restructured the company’s operations and eliminated many of the product offerings introduced the previous decade. Unfortunately, as the twentieth century was coming to a close, the nation’s appetite for condensed soup products was waning. The weakening demand for what Campbell insiders refer to as “red and white” prompted the company’s executives to take a more direct, if less palatable, approach to improving their company’s earnings.......

Questions 

1. Identify legitimate business practices that corporate executives can use for the primary purpose of manipulating or “managing” their company’s reported operating results. Are such practices ethical? Defend your answer.

2. Suppose that a company uses one or more of the practices that you identified in responding to the previous question. What implications, if any, do those practices have for the company’s independent auditors?

3. What auditing standard, if any, requires auditors to determine whether their clients have properly classified key amounts in their periodic income statements? Identify three methods that audit clients can use to put a favorable “spin” on their reported operating results without changing their “bottom line” or net income.

4. What audit procedures might have resulted in the discovery of the “shipping to the yard” and “guaranteed sales” schemes allegedly used by Campbell?

5. After reviewing PwC’s audit workpapers, JudgeIrenas ruled that there was insufficient evidence to support a strong inference of scienter or “reckless”
conduct on the part of the audit fi rm. Do you believe that PwC was “negligent”
in performing the 1998 Campbell audit? Defend your answer. Provide a hypothetical example related to the facts of this case under which PwC would have been guilty of “recklessness.”

6. Identify the parties affected by the PSLRA. Briefly explain how that federal statute affects each of those parties.