Minicase 1 Morrow Snowboards}
Snowboarding is a rapidly growing sport in the United States. Morrow Snowboards, located in Salem, Oregon, is a significant player in snowboard manufacture and sales. In 1995 Morrow announced it would sell shares of stock to the public. In its prospectus (an information-filled document that must be provided by every publicly traded U.S. firm the first time it issues shares to the public), Morrow disclosed the following information:

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(a) What implications does this disclosure have for someone interested in investing in Morrow Snowboards?

(b) Do you think that the price of Morrow's stock will suffer because of these admitted deficiencies in its internal controls, including its controls over inventory?

(c) Why do you think Morrow decided to disclose this negative information?

(d) List the steps that Morrow has taken to improve its control systems.

(e) Do you think that these weaknesses are unusual for a rapidly growing company?

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menaw MORROW SNOWBOARDS Prospectus Uncertain Ability to Manage Growth: Since inception, the Company has experienced rapid growth in its sales, production, and employee base. These increases have placed significant demands on the Company's management, working capital, and financial and management control systems. The Company's independent auditors used management letters in connection with their audit of the fiscal years ended December 31, 1993 and 1994, and the 9-month period ended September 30, 1995, that identified certain significant deficiencies in the Company's accounting systems, procedures, and controls. To address these growth issues, the Company has, in the past 18 months, relocated its facilities and expanded production capacity, implemented a number of financial accounting control systems, and hired experienced finance, accounting, manufacturing, and marketing personnel. In the accounting area, the Company has begun implementing or improving a perpetual inventory system, a cost accounting system, written accounting policies and procedures, and a comprehensive annual capital expenditure budget. Until the Company develops a reliable perpetual inventory system, it intends to perform physical inventories on a quarterly basis. Although the Company is continuously evaluating and improving its facilities, management, and financial control systems, there can be no assurance that such improvements will meet the demands of future growth. Any inadequacies in these areas could have a material adverse effect on the Company's business, financial condition, and results of operations.