Bill Grant sat in the middle of a large jail cell with 12 other inmates as the long October night dragged on.1 To pass the time, Grant and several other inmates played cards and talked about their hopes of being reunited with their families. The accommodations of the Tulsa County Jail were not unlike those of most jails: dirty, no lid on the toilet, and 12 beds for 13 inmates. What made this scene unusual was not the less-than-glamorous, overcrowded condition of the jail cell, but rather the presence of Grant, a Big Eight audit partner and graduate of the Harvard Business School. At the time, Grant served as the managing partner of the Tulsa office of Arthur Young & Company, but he was destined to become Arthur Young’s co-managing partner in 1988 shortly before that firm merged with Ernst & Whinney to form Ernst & Young.

Earlier that day, Grant had appeared in a Tulsa federal courthouse at a hearing presided over by Judge Allan Barrow. Judge Barrow had ordered Grant to produce certain audit workpapers that had been subpoenaed by a federal grand jury. Those workpapers had been prepared during an audit of the large oil company, Phillips Petroleum Company, a client of Arthur Young’s Tulsa office. When Grant respectfully denied the judge’s request, he was cited for civil contempt, handcuffed, and led away to jail. Apparently, the judge hoped that an overnight stay in a crowded jail cell would convince Grant to change his mind.

The federal grand jury’s interest in the Arthur Young workpapers stemmed from an ongoing investigation of Phillips. That investigation focused on possible tax fraud related to a secret, multimillion-dollar fund that Phillips’ executives had established to make political contributions. One contribution made from the secret fund, which was maintained in a Swiss bank account, was an illegal donation of \($100,000\) to what became known during the Watergate era as CREEP–the Committee to Reelect the President (Richard Nixon). Under the terms of an earlier plea bargain agreement with Watergate, special prosecutor Archibald Cox, Phillips’ chairman of the board, had admitted to the \($100,000\) contribution to Nixon’s 1972 reelection campaign and pleaded guilty to one misdemeanor.2 Following that plea bargain agreement, a sevencount indictment was filed against Phillips that charged the company with filing false federal tax returns for failing to report interest revenue earned on the secret Swiss bank account.

Prior to Bill Grant’s appearance before Judge Barrow, Arthur Young had turned over to the federal grand jury approximately 12,000 pages of Phillips’s audit workpapers.

Arthur Young, however, had refused to give the grand jury several workpapers relating to two key items: (1) certain tax accruals made by Phillips and (2) attorneys’ .........

Questions:-

1. Do you believe that Bill Grant was justified in refusing to provide the requested workpapers to the grand jury? Explain.
2. What responsibility, if any, does a public accounting firm have to its partners and employees when they are subpoenaed to testify regarding a client?

3. What is the purpose of “attorneys’ letters” obtained during the course of an audit? If attorneys are aware that these letters can be routinely subpoenaed, how does this fact likely affect the quality of the audit evidence yielded by these letters?
4. Do you believe the documentation included in tax accrual audit workpapers is likely affected by auditors’ knowledge that those workpapers can be obtained by the IRS? Explain.