Cumberland Lumber “It’s impossible! There is no justification for ignoring these entries.” These are the words spoken by Jackie Bauman at a meeting with the CFO of the company, Glen Donner.Cumberland Lumber is a regional company and privately owned by members of the Simon family. Jackie is the chief internal auditor at Cumberland Lumber, a large lumber liquidator in the Cumberland Valley of Pennsylvania. While she does not report directly to Glen Donner, the culture of the company is such that Glen makes the final call on accounting issues because he has CEO Larry Simon’s ear.

The issue being discussed between Jackie and Glen is whether a variety of year-end accruals should be recorded. These include:

1. Accrual for future vacation pay of $50,000.
2. Allowance for repairs and maintenance, $70,000.
3. Reserve for inventory obsolescence, $80,000.

The total amount of $200,000 is 25 percent of earnings for the year.

Jackie provides the following reasons for recording these amounts:

1. The accrual for vacation pay is based on a commitment to employees to pay these amounts so long as they use their vacation hours by the end of the following calendar year.
2. The allowance for repairs is an annual adjustment to reserve for future repair costs on machinery and equipment.
3. The reserve for inventory obsolescence is a new item but reflects the failure of the company to get rid of certain lumber products that have been on the books for almost two years.

Glen counters Jackie’s explanation as follows.

1. Employees may not take vacation time next year because the employment market is tight and there is an economic recession, so they may not want to leave, even for a week or two, for fear of losing their job.
2. Repairs and maintenance are discretionary expenditures, and there is no reason to accrue for them.
3. The “obsolete” inventory will be sold to a buyer who is willing to take it off the company’s hands so Glen suggests waiting until it is sold at that time for scrap value.
4. As a CPA, Jackie feels comfortable with her knowledge of the accounting rules. She tries to discuss her differences with Glen using this perspective. She also explains her ethical obligations. Glen simply tells Jackie not to make the entries if she wants to keep her job.

REQUIREMENTS:

Using the questions below, present your answer in the form of a Microsoft Word Memo to the appropriate party of your choosing (based on guidance). The total length should be 400-500 words. Feel free to go beyond the scope of the case if information is not provided you deem to be necessary.

When you are done, click on the Assignment Title in Blackboard and you will be taken to the area where you can upload the assignment.

https://www.wikihow.com/Write-a-Business-Memo

Put yourself in Jackie’s shoes, if you are right that the accounting entries should be made, what would be most important to you in deciding what to do in this case? – See rubric for information on how I will grade for critical thinking)

How would the company’s leadership and culture present a challenge? If you are going to blow the whistle, as a CPA, what type of obligations and provisions does she need to be aware? (rubric for information on how I will grade for critical thinking)

Please reference Exhibit 3.13 from your textbook (included in this document on page 3), Ethical Responsibilities of CPAs to Avoid Subordination of Judgement. Make sure you properly explain the chain of command in your responses.

Exhibit 3.13

Does the supervisor’s opinion at the reporting entity organization or at the external audit firm fail to comply with professional standards, create a material misrepresentation of fact, or violate applicable laws or regulations?

Ethical Responsibilities of CPAs to Avoid Subordination of Judgment

Still no adjustment? aadjustmentadjustment? adjustment

Consider the following safeguards to ensure that threats to compliance with Rule 102 are eliminated or reduced to an acceptable level:

• Determine whether internal reporting requirements exist to report differences of opinion
• Determine whether any responsibilities exist to communicate with third parties (i.e., regulatory authorities/employer’s or former employer’s external accountant)
• Seek legal advice

No safeguards exist to eliminate or reduce the threats to an acceptable level or appropriate action was not taken

DOCUMENT UNDERSTANDING OF THE FACTS, ACCOUNTING PRINCIPLES, AUDITING STANDARDS, AND APPLICABLE LAWS AND REGULATIONS

Discuss concerns with supervisor about the significant threats to integrity and objectivity

Yes

Bring concerns to higher levels of management of client organization (i.e., senior management/board of directors) or audit firm

No adjustment adjustment

NO ACTION REQUIRED

ADJUSTMENT MADE

END PROCESS

No

• Consider continuing relationship with member’s organization
• Take appropriate steps to eliminate exposure to the subordination of judgment
• Consider resigning position (this may not negate disclosure responsibilities to regulatory authorities or employer’s/former employer’s external accountant)