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1. Issues/Causes---- issues section we can have four volunteerseach take oneclassification (i.e operational, behavioral, ethical and accounting issues that are important in the case.) and

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1. Issues/Causes---- issues section we can have four volunteerseach take oneclassification (i.e operational, behavioral, ethical and accounting issues that are important in the case.) and write about that particular issue symptom within the case, along with the possible and the best courses of action to those issues they have chosen.

image text in transcribed Group Case 1 Glenda Shock was excited and somewhat panicked at the same time. Just two months ago, in April, she was promoted to senior auditor at Broder, Sams and Ultig (BSU), a regional full-service accounting firm headquartered in Indianapolis. She was starting her third year with the firm and was on the fast track. Glenda was bright, energetic and out to prove she was better than her peers and friends who took jobs with the large national accounting firms. She had her heart set on working for one of those large firms coming out of college, but now she was committed to her work and to BSU, determined to make partner someday. She had just received an assignment to plan and perform a due diligence engagement for BSU's largest client, ABC Company, a $500 million manufacturer and distributor of household consumer goods based in Columbus, Indiana. ABC Company was in the middle of negotiating to purchase Silko, a $50 million Toronto-based importer of high-quality cutlery from China. Glenda was thrilled to get such high-profile work and couldn't wait to get started. She was also worried about being successful with this opportunity while also meeting her other commitments, primarily audit wrap-up "to-do's" that somehow seem never to get done. When she was promoted, her mentor partner, Debby Quan, had explained that being a senior would challenge Glenda to develop her style to effectively manage others. For the time being, Glenda was being challenged simply to manage herself and juggle priorities. Glenda's first step was to discuss the project with BSU's audit manager, senior manager and partner assigned to ABC Company. She learned that ABC Company was very excited about the opportunity to add the Silko line to its stable. Silko was eager to leverage American's sales and marketing prowess to grow Silko's revenues in the United States. The transaction terms were largely negotiated and, with regulatory approval issues believed to be nonexistent, due diligence was the last major step to complete the deal. Glenda quickly surmised that she didn't have a lot of time and, in fact, was told due diligence needed to be wrapped up by the end of June-only eighteen days away. She also learned that she would get one staff auditor--her choice from whoever was available on the schedule--to assist with the engagement in Toronto. Glenda later met with her audit manager to choose a staff accountant to assist the due diligence effort in Toronto. There were five medium and senior staff accountants available. Glenda picked Jeff Harry, who had just completed his first busy season and was the star of his incoming class. Glenda then scheduled her client visit for the week of June 17. She would spend the remainder of the current week planning the due diligence, bringing Jeff up to speed and completing some of her open wrap-up "to-do's" from her busy-season audits. Glenda and Jeff traveled to Silko on Monday, ready to begin. Glenda had created an extensive due diligence program for her and Jeff to follow. She would spend her time in discussions with Silko's owner and key managers and helping Jeff establish support for Silko's financial statements. Jeff was responsible for gathering detailed financial reports and reconciling them to Silko's financial statements, including reviewing transactional support documents. When they arrived, Silko's owner, Saul Prestby, warmly greeted Glenda and Jeff. After some initial conversation and a quick tour, Saul introduced Glenda and Jeff to Silko's accounting manager, Sheri Landon. Saul had started the business five years ago after securing the North American distribution rights for the Silko product line from Tsingto Enterprises in China. Sheri had worked with Saul over the past five years as they grew the business from less than $1 million in annual revenues to just over $50 million today. Saul, Glenda and Jeff went out for lunch to discuss the due diligence plan and the upcoming week's events. During lunch Glenda learned that Saul, a successful entrepreneur now sixty-one years old, had started several businesses with international ties, the last of which led to his relationship with Tsingto. Glenda also learned that while Saul was a lifelong Canadian resident and very much enjoyed life in Canada, he was also displeased with Canada's taxation policies that, at the margin, were over 50% for business and individuals. She also noticed that the restaurant patrons were all paying in cash, as did Saul. Saul intimated that much business was transacted in cash in Canada due to the high tax rates. He said that if the government's taxing policies were more reasonable, more taxes would ultimately be collected because businesses would employ fewer tax avoidance schemes. Glenda thought this was interesting and wondered how Canada's taxes and Saul's views and actions might affect her due diligence plan. It was now Wednesday and Glenda and Jeff were well into their due diligence plan. Clearly Silko was a very profitable business with simple operations. Glenda was thinking the acquisition made sense for her client when Jeff approached her. "Glenda, this is weird. As I look through my inventory work papers, I have two detailed perpetual inventory listings with the same date but materially different quantities and inventory values. I need to discuss this with Sheri. I can tie one of the inventory listings, the higher one, to the review report issued by their New York CPA." Glenda thought about this and said, "Yes, Jeff, let's discuss this with Sheri right away, but let's also keep this quiet until we can talk to her." Glenda felt it was no accident Jeff had the two inventory listings, and that Sheri might be trying to tell them something. When Jeff began asking about the inventory listings, Sheri was visibly uncomfortable. "Jeff, we made some top-level changes to the perpetual inventory." "Okay," Jeff said, "what are the reconciling items to explain the adjustments?" "I think you should discuss this with our accountant, Mr. Kirkpatrick," Sheri told him. Jeff briefed Glenda, who now knew something was not right. Glenda stopped by to see Sheri. "Okay Sheri, what's up? You know we have a problem with the inventory listings. Will you help me sort it out?" "Listen Glenda," Sheri replied, "Saul Prestby is a good man. Sometimes he can be a little too creative in order to mitigate his tax payments. It is not uncommon in Canada. I really can't discuss this. That second perpetual listing that you found is all you need. Talk to Saul and talk to Mr. Kirkpatrick." Then Sheri handed Glenda a piece of paper. The look on her face said, "You didn't get this from me." Glenda thanked Sheri and headed back to her conference room work area. As Glenda was reviewing the paper she received from Sheri, she was thinking, "Now things really get interesting." The piece of paper was a statement for a Silko-owned Swiss bank account showing deposits from Tsingto. As Glenda checked the due diligence work papers, she learned that in fact this account was not included in the assets of Silko. Now Glenda was excited again but also very anxious. She had clearly uncovered some troublesome financial transactions that she knew ABC Company would be interested in, but she was beginning to feel that she was getting in over her head. Glenda phoned her audit manager, Tom McCarr. "Tom, I think we have a few problems with Silko. They may be hiding some income through misstated financials and unreported product purchase rebates. I really need some help to sort this out. Silko's CPA is a Mr. Kirkpatrick in New York. I'm pretty sure he is in the loop on this." Glenda went on to explain all that she knew. Tom processed Glenda's update and said, "Okay Glenda. It sounds like you have uncovered some tax avoidance schemes. Good work! I want you to call Mr. Kirkpatrick and confront him on these issues. I will call Saul Prestby and discuss our issues with him. Please do not discuss this with anyone else until we talk again. Please call me right after you finish your discussion with Mr. Kirkpatrick. Thanks, and hang in there. You are handling this perfectly." Glenda was not looking forward to her call with Mr. Kirkpatrick. "Mr. Kirkpatrick, I am Glenda Shock from Broder, Sams and Ultig. We are performing the Silko purchase due diligence for ABC Company. I think Mr. Proctor said you would be available as needed." Mr. Kirkpatrick said he was aware of the ongoing due diligence and would help in any way he could. "Mr. Kirkpatrick, I have discovered some potential problems with your last review report and the underlying inventory values. I have two perpetuals, one significantly higher than the other, for the financials review date. I discussed this with Sheri and she asked me to call you. Also, I found a Swiss bank account statement with deposits to Silko from Tsingto. According to Silko's financials, this account doesn't exist, although the statement suggests it has been around since Silko started." "Glenda, I understand your questions," Mr. Kirkpatrick said. "I know they are important for you to resolve to complete your due diligence. I would like to discuss them in person rather than over the phone. I will clear my calendar any day next week to meet with you here in New York." Glenda had hoped there was a logical and legal explanation for what was going on. She now knew from Mr. Kirkpatrick's reaction that the situation was real and would not go away. She also had a deadline. "Thanks Mr. Kirkpatrick, I appreciate your offer. This cannot wait until next week. I will plan to be in your offices tomorrow morning by 10 a.m. I will see you tomorrow." Mr. Kirkpatrick reluctantly agreed and the meeting was set. Glenda was hoping she had done the right thing. She called Tom to discuss her meeting. "I spoke with Saul and he was forthright about the whole thing," he told her. "Let's just say he has taken some very aggressive tax positions. I am not yet sure how this affects the purchase, if it does at all. I have discussed this with ABC Company and their attorneys are evaluating. How did your call go?" Glenda was greatly relieved that Tom seemed to have everything under control. "Well, Mr. Kirkpatrick was pleasant enough, but he wouldn't discuss anything over the phone. I set up a meeting with him tomorrow morning in his office in New York. Do you think I should still go?" "Yes, Glenda, go ahead," Tom told her. "Let's plan to finish our onsite work by the end of the week. We'll wrap up everything in the office next week. How does that sound?" Glenda agreed and they hung up

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