Renée Ritter opened a small grocery and related products convenience store in 1993 with the money she had saved working as a Loblaws store manager. She named it Ritter Dairy and Fruits. Because of the excellent location and her fine management skills, Ritter Dairy and Fruits grew to three locations by 1998. By that time, she needed additional capital. She obtained financing through a local bank at 2 percent above prime, under the condition that she submit quarterly financial statements reviewed by a public accounting firm approved by the bank. After interviewing several firms, she decided to use the firm of Gonzalez and Fineberg, PAs, after obtaining approval from the bank.
By 2002, the company had grown to six stores, and Ritter developed a business plan to add another 10 stores in the next several years. Ritter's capital needs had also grown, so she decided to add two business partners who both had considerable capital and some expertise in convenience stores. After further discussions with the bank and continued conversations with the future business partners, she decided to have an annual audit and quarterly reviews done by Gonzalez and Fineberg, even though the additional cost was almost $15 000 annually. The bank agreed to reduce the interest rate on the $5 000 000 loan to 1 percent above prime.
By 2007, things were going smoothly, with the two business partners heavily involved in the day-to-day operations and the company adding two new stores per year. The company was growing steadily and was more profitable than they had expected. By the end of 2008, one of the business partners, Fred Warnest, had taken over responsibility for accounting and finance operations, as well as some marketing. Annually, Gonzalez and Fineberg did an in-depth review of the accounting system, including internal controls, and reported their conclusions and recommendations to the board of directors. Specialists in the firm provided tax and other advice. The other business partner in the dairy, Ben Gold, managed most of the stores and was primarily responsible for building new stores. Ritter was president and managed four stores.
In 2012, the three business partners (now the executive management of the company) decided to go public to enable them to add more stores and modernize the existing ones. The public offering was a major success, resulting in $25 million in new capital and nearly 1000 shareholders. Ritter Dairy and Fruits added stores rapidly, and the company remained highly profitable under the leadership of Ritter, Warnest, and Gold.
Ritter retired in 2015 after a highly successful career. During the retirement celebration, she thanked her business partners, employees, and customers. She also added a special thanks to the bank management for their outstanding service and to Gonzalez and Fineberg for being partners in the best and most professional sense of the word. She mentioned their integrity, commitment, high-quality service in performing their audits and reviews, and considerable tax and business advice for more than two decades.
REQUIRED
a. Explain why the bank imposed a requirement of a quarterly review of the financial statements as a condition of obtaining the loan at 2 percent above prime. Also, explain why the bank did not require an audit and why the bank demanded the right to approve which public accounting firm was engaged.
b. Explain why Ritter Dairy and Fruits agreed to have an audit performed rather than a review, considering the additional cost of $15 000.
c. What did Ritter mean when she referred to Gonzalez and Fineberg as "partners"? Does the PA firm have an independence problem?
d. What benefit do Gonzalez and Fineberg provide to shareholders, creditors, and management in performing the audit and related services?
e. What are the responsibilities of the PA firm to shareholders, creditors, management, and others?