Minimal Disclosure ETHICS CASE Ted was the manager and Cad the partner on the audit of Smart Investments limited, an investment company whose shares were traded on the NASDAQ exchange. They were discussing the issues to be debated at the upcoming Audit Committee meeting to finalize the financial statements and audit for the current year.
As I see it, Cad, we have three problems that are going to be difficult because it's not in the interests of the CEO, CFO, and some directors to go along with us. Remember that all those stock options that may be exercised next month at $7.50 per share and with the stock trading at $9.50 now-well, they aren't about to upset the price with negative news.'
Anyway, the rules call for segmented disclosure of significant lines of business, and this year the company has made 55 percent of its profit through the trading of derivative securities. It's awfully high risk and I'm not sure they can keep it up, so I think they ought to add a derivative securities disclosure column to their segmented disclosure information. They are going to argue that they are uncertain how much profit relates to derivative securities trading by itself, and how much was realized because the derivative securities were part of hedging transactions to protect foreign currency positions,'
'The second issue concerns their reluctance to reveal the potential lawsuit by their client, Bonvest Mutual Funds, for messing up the timing and placement of orders for several mining securities. I believe it should be mentioned in the Contingent Liabilities note, but they may be dragging their feet on calculating the size of the problem They don't want to disclose an amount, anyway, because they argue that Bonvest will set that figure as the lower bound for its claim?
'Finally, as you know, the statements we are auditing are consolidated and include the accounts of the parent and four subsidiaries. One of these subs, Caribbean Securities Limited, is in tough shape, and I think they may let it go broke. That's the sub which is audited by the Bahamian firm of Dodds & Co., not our own affiliate there. There is no qualification on the Dodds & Co. audit opinion, though, but I know how these guys at Smart think?
'I realize that a lot of this is speculative, but each of these issues is potentially material. How do you want to play each of them?'
Question
What should Cad, the partner, plan to do?