Intercompany and Interpersonal Investment Relations. LO3 You have been engaged to audit the financial statements of Hardy Hardware Distributors Inc. as of December 31. In your review of the corporate non-financial records, you have found that Hardy Hardware owns 15% of the outstanding voting common shares of Hardy Products Corporation. Upon further investigation, you learn that Hardy Products Corporation manufactures a line of hardware goods, 90% of which are sold to Hardy Hardware. James L. Hardy, president of Hardy Hardware, has supplied you with objective evidence that he personally owns 30% of the Hardy Products voting shares and that the remaining 70% is owned by Janice L. Hardy, his sister and president of Hardy Products. James also owns 20% of the voting common shares of Hardy Hardware Distributors. Another 20% is held by an estate of which James and Janice are beneficiaries, and the remaining 60% is publicly held. Hardy Hardware has consistently reported operating profits greater than the industry average. Hardy Products Corporation, however, has a net return on sales of only 1%. The Hardy Products investment has always been reported at cost, and no dividends have been paid by the company. During the course of your conversations with the Hardy siblings, you learn that you were appointed as auditor because the siblings had a heated disagreement with the former auditor over the issues of accounting for the Hardy Products investment and the prices at which goods have been sold to Hardy Hardware.

Required: a. Identify the issues in this situation as they relate to (1) conflicts of interest and (2) controlling influences among individuals and corporations.