Franklin Lumber Company

"It's impossible! There is no justification for ignoring these entries." These are the words spoken by Shirley Wilsonat a meeting with the CFO of the company, Josiah Menzer.

Franklin Lumber Company is a regional company privately owned by members of the Schuster family. Shirley is the chief internal auditor at Franklin Lumber Company, a large lumber liquidator in the North Central Piedmont area of North Carolina. While she does not report directly to Josiah Menzer, the company's culture is such that Josiahmakes the final call on accounting issues because he has CEO Wally Schuster's ear.

The issue being discussed between Shirley and Josiah is whether a variety of year-end accruals should be recorded. These accruals included:

Accrual for future vacation pay of $70,000.

Allowance for repairs and maintenance, $80,000.

Reserve for inventory obsolescence, $100,000.

The total amount of $250,000 is 25 percent of earnings for the year. Shirley provides the following reasons for recording these amounts:

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.

The allowance for repairs is an annual adjustment to reserve for future repair costs on machinery and equipment.

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.

Josiah counters Shirley's explanation as follows.

Employees may not take a vacation 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.

Repairs and maintenance are discretionary expenditures, and there is no reason to accrue for them.

The "obsolete" inventory will be sold to a buyer willing to take it off the company's hands, so Josiahsuggests waiting until it is sold for scrap value.

Franklin Lumber Company

Am I right that if the accounting entries should be made, what would be most important to decide as to what to do in this case?

How would the company's leadership and culture present a challenge?

If she was going to "blow the whistle", as a CPA what type of obligations and provisions does she need to be aware of?

How can Shirley avoid violating subordination of judgement?