“I’m sorry, Jen. That’s the client's position,” Travis said. “I just don’t know if I can go along with it, Travis,” Jen replied. “I know. I agree with you. But, Chefs Delight is our biggest client, Jen. They’ve warned us that they will put the engagement up for bid if we refuse to go along with the reclassification of marketable securities,” Travis explained. Jen asked, “Have you spoken to the engagement review partners about it?” "They recommended giving in to the client on this matter," Travis responded. "Listen, I understand the pressures of being the engagement partner and the need to keep the client happy, but this goes too far" Jen said. The previous scene took place in the office of Trending Upwards, a large CPA firm in Beverly Hills, California. Jen is the Senior Manager on the engagement of Chefs Delight, a publicly owned global manufacturer of Chef’s cookware. Travis is the Partner in charge of the engagement. The engagement review partners make final judgments on difficult accounting issues, especially when there is a difference of opinion with the client. All of these individuals are CPAs. Travis is preparing for a meeting with Chef Norman, the CEO of Chefs Delight. Travis knows that the company expects to borrow $5 million next quarter and it wants to put the best possible face on its financial statements to impress the banks. That would explain why the company reclassified a $2 million market loss on a trading investment to the available-for-sale category so that the “loss” would now show up in stockholder’s equity, not as a charge against current income. The result was to increase earnings in 2021 by 8 percent. Travis knows that without the change, the earnings would have declined by 2 percent and the company’s stock price would have taken a hit. In the meeting, Travis decides to overlook the recommendation by the engagement review partners. He felt Jen made valid points. Travis points out to Chef that the investment in question was marketable, and in the past, the company had sold similar investments in less than one year. Travis adds there is no justification under GAAP to change the classification from trading to available-for-sale. What happened next shocked Travis back to reality. The conversation between Chef Norman and Travis went this way. “I hate to bring it up, Travis, but do you recall what happened last year at about the same time?” “What do you mean?”, Travis replied Chef then stated “You agreed that we could record $1 million as revenue for 2020 based on a sale of our product that we held at an off-site distribution warehouse until the client asked for delivery, which occurred in 2021.” Travis remembered all too well. It almost cost the firm the Chefs Delight account. “Are you going to throw that in my face?” Travis said rather heatedly. “No, Travis. Just a gentle reminder that you had agreed to go along with what we had asked at that time. We believe there is enough gray area to do the same here. Who knows, we may hold on to the investment for more than one year." Chef said calmingly. The meeting broke up when Chef received a confidential phone call. They agreed to continue it first thing in the morning. Chef Norman's parting words were "we value loyalty in our accountants." Questions. 1. Explain how incrementalism might influence Travis’s position with respect to the not so subtle statement by Chef Norman. 2. Assume you are in Travis’s position and preparing for the meeting with Chef Norman in the morning. Consider the following in crafting a response to him. • What are the main arguments you are trying to counter? • What is at stake for the key parties? • What levers can you use to influence Chef Norman? • What is your most powerful response to the reasons and rationalizations you need to address? To whom should the argument be made? When and in what context?
> In Chapter 4 we discussed the artificial tax shelter arrangements developed by KPMG LLP for wealthy clients that led to the settlement of a legal action with the Department of Treasury and the Internal Revenue Service. On August 29, 2005, KPMG admitted t
> One of the earliest frauds during the late 1990s and early 2000s was at Sunbeam. The SEC alleged in its charges against Sunbeam that top management engaged in a scheme to fraudulently misrepresent Sunbeam’s operating results in connecti
> On March 4, 2009, the SEC reached an agreement with Krispy Kreme Doughnuts, Inc., and issued a cease-and-desist order to settle charges that the company fraudulently inflated or otherwise misrepresented its earnings for the fourth quarter of its FY2003 a
> What are financial statement restatements?
> On June 12, 2017, GE announced that 30-year GE veteran and current President and CEO of GE Healthcare John Flannery would be replacing Jeff Immelt as CEO of the company as of August 1, 2017. Immelt had been the CEO for 16 years, taking over that role fro
> The Kraft Heinz Co. case was discussed in the chapter. To refresh your memory, on May 6, 2019, Kraft Heinz disclosed that it would restate its financial statements due to faulty procurement practices. The financial statements for 2016, 2017, and the firs
> Monsanto is an agricultural seed and chemical company that manufactures and sells glyphosate, an herbicide, under the trade name “Roundup.” Roundup historically was one of Monsanto’s most profitable products, and the company sells it to both retailers an
> Jeremy Strong, CPA was recently hired as the new CFO of Imageware Consolidated (IC) a small publicly owned company. This is Jeremy’s first job outside of public accounting, leaving Deloitte after ten years, where he rose in the ranks to senior audit and
> Meredith Merriweather, CPA is the CFO of Trego Bikes and Trikes (TBT), a manufacturer of Bicycles ranging from tricycles to high end racing bikes. The company has good market penetration and has seen a very stable demand for its bikes over the last few y
> The story of Theranos, a company that sought to make blood tests cheaper, is a cautionary tale for Silicon Valley about what can happen when a company fails to develop internal control systems or overrides them, and when the CEO creates a psychological c
> You just became the new external auditor of a large public company that carries freight throughout the world. You just began to audit the 2021 financial statements and have come across a transaction that occurred in 2020 that would materially change the
> The North Face, Inc. (North Face) is an American outdoor product company specializing in outerwear, fleece, coats, shirts, footwear, and equipment such as backpacks, tents, and sleeping bags. North Face sells clothing and equipment lines catered toward w
> The SEC bought an action against BMW NA for inaccurate disclosures of its retail vehicle sales volume in the United States. In order to close the gap between actual retail sales volume and internal retail sales targets, and in an effort to publicly maint
> According to an October 16, 2017, article by Richard Clough of Bloomberg News,1 General Electric reported earnings per share of $.28, $.13, $.19 and $.15 for the quarter ending September 30, 2017, on an earnings call. Yes, you read that correctly, GE rep
> What is the risk of management bias for each earnings judgment and estimate? What safeguards should be in place to mitigate the risk of management bias, if any? What is the external auditor’s role in this process?
> It took a long time but the Securities and Exchange Commission finally acted and held auditors responsible for the fraud that occurred in banks during the financial recession in 2014. Surprisingly to some, the TierOne bank case explained below was the na
> It’s no fun accepting a position for your dream job and then red flags are raised that make you wonder about the culture of the company. Those are the thoughts of Donna Mason on January 18, 2022, as she prepares for a meeting with her a
> The CFO, King Bernard, of Blackswan Petfood, a large publicly traded manufacturer of organic gourmet dog and cat food, is getting ready for the quarterly conference call with major investors and financial analysts in two days. The King has been reviewing
> Exhibit 1 presents the fourth quarter press release of Allergan. Allergan is a global pharmaceutical company and a leader in a new industry model – Growth Pharma. Allergan’s product lines include Botox, Juvederm, Latis
> We can’t recognize revenue immediately, Paul, since we agreed to buy similar software from DSS,” Sarah Young stated. “That’s ridiculous,” Paul Henley replied. &acir
> Winners & Losers, Inc. (WLI) is a Nevada corporation with its principal place of business in Las Vegas. Its business model is to provide electronic sports betting in conjunction with a new law that legalized it in Nevada. The companyâ€
> Weatherford International PLC is a multinational Irish public limited company based in Switzerland, with U.S. offices in Houston, Texas. Weatherford’s shares are registered with the SEC and are listed on the NYSE. Weatherford files peri
> Ronnie Maloney, an audit partner for Forrester and Loomis, a registered public accounting firm in Boston, just received a meeting request from Jack McDuff, the chairman of the audit committee of Digital Solutions, one of his clients. The audit committee
> Diamond Foods, based in Stockton, California, is a premium snack food and culinary nut company with diversified operations. The company had a reputation of making bold and expensive acquisitions. Due to competition within the snack food industry, Diamond
> Maines and Wahlen state in their research paper on the reliability of accounting information: “Accrual estimates require judgment and discretion, which some firms under certain incentive conditions will exploit to report non-neutral accruals estimates wi
> In what some are suggesting is the worst financial reporting fraud since Enron, Wirecard filed for bankruptcy in June of 2020 after admitting that €1.9 billion Euros ($2.1bn U.S.) on its balance sheet (representing roughly 25% of its total assets) probab
> Travis McGee, a Senior Audit Manager for a Big Four Audit, Consulting, Tax and Data Analytics organization, has just spent the last year helping the firm rollout its new Artificial Intelligence (AI) based audit infrastructure. Travis is considered one of
> On January 30, 2018, General Electric (GE) announced that it was taking an after-tax charge of $6.2 billion in the December 31, 2017 financial statements and additional cash funding of $15 billion in statutory capital contributions to its insurance subsi
> Margaret Dairy is a CPA and the managing partner of Dairy and Cheese, a regional CPA firm located in northwest Wisconsin. She just left a meeting with a well-respected regional credit union headquartered in her hometown. Margaret was asked whether her fi
> Richard Lange, CPA, is a sole practitioner. The largest audit client in his office is Echo Park Sportswear (EP Sports). EP Sports is a privately owned company in South Bend, Indiana with a 12-person board of directors. Richard was hired by the audit comm
> Assume Ethan Lester and Vick Jensen are CPAs. Ethan was seen as a “model employee” who deserved a promotion to director of accounting, according to Kelly Fostermann, the CEO of Fostermann Corporation, a Maryland-based, largely privately held company that
> PwC violated SEC rule 2-02(b) of Regulation S-X and PCAOB Rule 3525 by engaging in improper professional conduct in violation of the independence rules on audit clients. This case is unique because the firm had mischaracterized certain nonaudit services
> On September 10, 2019, the Public Company Accounting Oversight Board (PCAOB) censured Marcum LLP and Alfonse Gregory on the basis of its findings that Marcum repeatedly violated PCAOB rules and standards over the course of four years by failing to satisf
> When Karen Ward started at Ernst & Young in 2013, only four senior managers in her division were women. All the partners were men. This was a red flag, but she didn’t see it then but soon realized that EY’s lack of female leaders was no accident but the
> Joe Kang is an owner and audit partner of Han, Kang & Lee, LLC. As the audit of Frost Systems was reaching its concluding stages on January 15, 2022, Kang met with Kate Boller, the CFO, who is also a CPA, to discuss the inventory valuation of one its hig
> Do you agree with Thomas McKee's conception of earnings management as applied to (a) operational earnings management and (b) accounting earnings management?
> Katy Carmichael, CPA, was just promoted to audit manager in the technology sector at a large public accounting firm. She started at the firm six years ago and has worked on a number of the same client audits for multiple years. She prefers being placed o
> Family Games, Inc., is a privately owned company with annual sales from a variety of wholesome electronic games that are designed for use by the entire family. The company sees itself as family-oriented and with a mission to serve the public. However, du
> Lance Popperson woke up in a sweat, with an anxiety attack coming on. Popperson popped two anti-anxiety pills, laid down to try and sleep for the third time that night, and thought once again about his dilemma. Popperson is an associate with the accounti
> In the first three months of 2021, Johnson Pharmaceutical’s sales and earnings were declining, placing the company in financial distress. As a result, Johnson had begun the process of borrowing $1 million to stay afloat. Around the same time, Paul Leona
> Jerry Maloney, CPA has been working at Mason Pharmaceuticals for fifteen years. Mason is a Fortune 1000 company whose stock trades on the New York Stock Exchange. He came to Mason after starting his career in the audit practice of PwC working on clients
> In 2005, Tony Menendez, a former Ernst & Young LLP auditor and Director of Technical Accounting and Research Training for Halliburton, blew the whistle on Halliburton’s accounting practices. The fight cost him nine years of his life. Just a few months la
> On September 8, 2016, Wells Fargo announced it was paying $185 million in fines to Los Angeles city and federal regulators to settle allegations that its employees created millions of fake bank accounts for customers. It also agreed to pay $142 million i
> John Stanton, CPA, is a seasoned accountant who left his Big-4 CPA firm Senior Manager position to become the CFO of a highly successful hundred million-dollar publicly-held manufacturer of solar panels. The company wanted John’s expertise in the renewab
> What possessed a CEO to hype a product that didn’t work and lie to financial institutions, pharmacies, the government, and the public about it? Is it hubris; plain and simple? Or was there something nefarious going on? The case of Theranos, an once high-
> What prompted partners at KPMG to facilitate cheating on internal training exams? In 2018, Timothy Daly, a former lead engagement partner, solicited and received questions and answers to the examination from a colleague, who was a second audit partner on
> Needles talks about the use of a continuum ranging from questionable or highly conservative to fraud to assess the amount to be recorded from for an estimated expense. Do you believe that the choice of an overly conservative or overly aggressive amount w
> Leaving home for the first time and going off to college is an exciting and stressful time for tens of thousands of students across the U.S. each year. Leaving the familiarity of family, friends and community behind and entering an often much more divers
> You are the Controller for Mountain Manufacturing which produces specialized components used in the manufacturing of cell phones sold by Apple, Motorola, and Samsung. The company is located in Southglenn Colorado, a suburb of Denver. Demand for your prod
> Jenna was irritated after class today. A classmate, Ben, had argued about the need for social justice reform that included defunding the police. Jenna was offended by the comments in part because her father was a policeman. She spoke to others in her cir
> Cleveland Custom Cabinets is a specialty cabinet manufacturer for high-end homes in the Cleveland Heights and Shaker Heights areas. The company manufactures cabinets built to the specifications of homeowners and employs 125 custom cabinetmakers and insta
> Section 179 of the IRS tax code allows qualifying businesses to deduct the full cost of “eligible property” on their income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated over its useful life. The pr
> Milton Manufacturing Company produces a variety of textiles for distribution to wholesale manufacturers of clothing products. The company’s primary operations are located in Long Island City, New York, with branch factories and warehous
> On October 5, 2017, New York Times Investigative reporters Jodi Kantor and Megan Twohey broke the story ‘Harvey Weinstein Paid Off Sexual Harassment Accusers for Decades.’ Harvey Weinstein is one of the most powerful and influential movie executives in
> Sam and John have been friends for 20 years. They met in college and worked together for 10 of the 20 years. During that time, each made a promise that if they won a lottery they would share the winnings 50:50. Even though they drifted apart over the yea
> Hailey Declaire, a CPA, just sent the tax return that she prepared for a client in the marijuana growing and distribution business, Weeds ‘R’ Us, to Harry Smokes the manager of the tax department. Harry had just fielded a phone call from the president of
> Relevance and faithful representation are the qualitative characteristics of useful information under SFAC 8. How does ethical reasoning enter into making determinations about the relevance and faithful representation of financial information?
> Veronica Betterman, a fifth-year accounting major at Anywhere University, wakes up in a cold sweat. Like many accounting majors, Veronica did an internship in public accounting the previous spring resulting in a full-time job offer with Anywhere CPAs to
> Ed Giles and Susan Regas have never been happier than during the past four months since they have been seeing each other. Giles is a 35-year-old CPA and a partner in the medium-sized accounting firm of Saduga & Mihca. Regas is a 25-year-old senior accoun
> What motivates a parent to bribe key people to get their kid admitted to a prestigious university? That is the ethical question of “Operation Varsity Blues.” In March 2019, the story broke of an alarming fraudulent scheme by parents to pay off middleman
> Some people believe that promise-keeping is the essence of ethical behavior. Do you agree?
> According to the website Indeed, one question to ask the interviewer when you are interviewing for a job is: "What are the characteristics of someone who would succeed in this role?" Why might you ask such a question?
> Do you think it is ethical for a prospective employer to investigate your social media footprint in making a hiring decision? What about monitoring social networking activities of employees while on the job?
> One explanation about rights is that there is a difference between what we have the right to do and what the right thing to do is. Explain what you think is meant by this statement. Do you believe that if someone attacks your credibility on social media
> Why are Equity, Diversity and Inclusivity considered to be important for businesses today?
> Is there a difference between cheating on a math test, pocketing an extra $10 from the change given to you at a restaurant, and using someone else’s ID to get a drink at a bar?
> Is it ever appropriate to lie to someone? Explain why or why not using ethical reasoning. Give one example of when you believe lying might be justified.
> Explain the SEC rules and regulations applicable to the public disclosure of non-GAAP financial measures.
> There is an old industry joke that if you ask an accountant what is four plus four, they will tell you it's whatever you want it to be. Explain what might be meant by this statement.
> Cedargrove Cider processes and bottles apple cider for sale through retail and big box grocery outlets. It had no work in process on May 31 in its only inventory account. The company started 19,100 cases during June. On June 30, work in process is 4,000
> Barrett eSellers is an online retail store offering a variety of products. As a part of its business model, it offers free returns. The returns are processed at the Returns Processing Facility (RPF) near one of the air freight hubs. The RPF checks the re
> Refer to the example in Appendix B. The numbers in Exhibit 5.21 for the fifth, sixth, and seventh units were given. Required Using the formula Y = aXb and the data given in the problem, verify the labor time required and the cost amounts for the fifth, s
> Fountain Precision Products (FPP) manufactures high-technology measurement systems. The systems are both complex and unique in the sense that only a handful are sold, usually to a single customer’s specification. The last unit of model FPP-28X sold was t
> Winkleman Associates requires prospective recruits to take an examination that includes both computational and essay questions. It employs contract workers to grade the exams. Hiring of Winkleman recruits takes place four times per year, and a different
> Shrewsbury Technologies, which manufactures high-technology instruments for spacecraft, is considering the sale of a navigational unit to a private company that wishes to launch its own communications satellite. The company plans to purchase 8 units, alt
> Clarion Clinics operates a chain of 24-hour walk-in clinics. The administrator is trying to understand the variation in Clarion’s costs across the different clinics. The chief medical officer believes that the number of walk-in clients
> Refer to the information for Point Products in Exercise 5-54. The managers at Point Products are uncertain what to do with these costs estimation results. Specifically, they are uncertain which, if either, method (account analysis or regression analysis)
> Point Products produces field hockey balls, which are packaged in cases. The balls are produced in a single plant. Because of the nature of the production process at Point Products, overhead includes all labor costs. Data on production output (in cases)
> Belfast Export-Import Partners has a large staff of buyers and sales personnel who travel extensively on company business. The CFO is trying to manage travel costs for the sales staff and has collected monthly information from the past 24 months on sales
> How would cost accounting information help managers in a not-for-profit organization? Is it as important as in a publicly traded, for-profit firm?
> Talon Services offers standardized job counseling services. The company is planning a new service line targeted to active seniors who are retiring and looking forward to a new career. The service will sell for a flat $960 per client and will consist of a
> Refer to the data and results from Exercises 5-44 through 5-50 for Waveney DIY Centers. Managers at Waveney are unsure which estimate of store costs should be used when planning new stores and have asked you for a recommendation. Required Based on the re
> Refer to the information in Exercise 5-44 for Waveney DIY Centers. Required a. Use the high-low method to estimate the fixed and variable portions of store costs based on store area. b. The managers in the region are interested in opening a new store wit
> Waveney DIY Centers (WDC) operates a few dozen stores in the eastern United States. The stores are popular with home remodelers, contractors, and do-it-yourself customers. The managers at Waveney are interested in understanding what drives costs as well
> Refer to the data and results from Exercises 5-36 through 5-42 for Fiske Corporation. Managers at Fiske Corporation are unsure which estimate of factory costs should be used next quarter and have asked you for a recommendation. Required Based on the resu
> Refer to the information in Exercise 5-36 for Fiske Corporation. Required a. Use the high-low method to estimate the fixed and variable portions of factory costs based on machine-hours. b. Managers expect the plant to operate at 21,000 machine-hours next
> Fiske Corporation manufactures a popular regional brand of kitchen utensils. The design and variety have been fairly constant over the last three years. The managers at Fiske are planning for some changes in the product line next year, but first they wan
> Witherell Musum of Technology (WMT) provides the following data on the costs of maintenance and the number of visitors for the last four quarters: Required a. Use the high-low method to estimate the fixed cost of quarterly staffing and the staffing cost
> Kirby Fasteners supplies the electronics industry with accessories for cases, disc enclosures, and so on. Below are the costs and volumes for the past six months at its Plant #6: Required a. Use the high-low method to estimate the monthly fixed cost of p
> Leach Finishing makes various metal fittings for the construction industry. Three of the fittings, models X-12, X-24, and X-30, require grinding on a patented machine of which Leach has only one. The cost-of-production information for the three products
> How does a value income statement differ from a gross margin income statement? From a contribution margin income statement?
> Brandon Technology makes two models of a specialized sensor for the aerospace industry. The difference in the two models relates to the required accuracy of the sensor. The Standard model is used for most normal operations while the High-Performance mode
> Wing Sporting Goods (WSG) is a small company that makes two models of a metal baseball bat— Sport and Collegiate. Both models are produced on a single machine. The price and costs of the two models are The one machine that is used to pr
> ASA Tours operates a network of offices around the globe specializing in local tours given by local residents and academics. Depending on the year, it operates at between 60 and 70 percent of capacity, which consists of locals who meet the criteria requi
> Refer to the information in Exercise 4-42. A new customer has approached Rathbone Industries and asked if it could make an instrument for the customer’s medical testing equipment. If it chose to take on this work, Rathbone would not be
> Lantz Family Restaurant operates in a suburb of a major city. Recently, the managers at Lantz have noticed an increase in the use of delivery apps such as Grubhub and DoorDash by their customers. The average fee paid by Lantz for this service currently i
> Refer to the facts in Exercise 4-39. Harbortown management is concerned about future changes in material prices arising from volatility in the commodities market. Required At what unit costs for materials would HMP be just indifferent between making and
> Coram Audio makes wireless headphones. Each pair of headphones comes with a travel case. Since its founding, Coram has manufactured its own travel cases. Recently, Holmur Travel Gear (HTG), a local outfitter that manufactures and sells backpacks, tent ca
> Short Bakers makes baked goods for catered events and for sale at local grocery stores. The owner of Short Bakers believes that a new type of breakfast pastry would sell well for a price of $9 per dozen. Short estimates unit materials costs to be $4.25 f
> Mather, Inc. makes and sells enclosures for external hard drives. Mather management believes that a new model of enclosure made out of a hard plastic would sell well at a price of $17.00. Labor costs are estimated at $5.30 per unit and overhead costs wou
