Cumberland Lumber

Its impossible! There is no justification for ignoring these entries. These are the words spoken by Jackie Bauman at a meeting with the CFO of the company, Glen Donner.

Cumberland Lumber is a regional company and privately owned by members of the Simon family. Jackie is the chief internal auditor at Cumberland Lumber, a large lumber liquidator in the Cumberland Valley of Pennsylvania. While she does not report directly to Glen Donner, the culture of the company is such that Glen makes the final call on accounting issues because he has CEO Larry Simons ear.

The issue being discussed between Jackie and Glen is whether a variety of year-end accruals should be recorded. These include:

1. Accrual for future vacation pay of $50,000.
2. Allowance for repairs and maintenance, $70,000.
3. Reserve for inventory obsolescence, $80,000.

The total amount of $200,000 is 25 percent of earnings for the year.

Jackie provides the following reasons for recording these amounts:

1. The accrual for vacation pay is based on a commitment to employees to pay these amounts so long as they use their vacation hours by the end of the following calendar year.
2. The allowance for repairs is an annual adjustment to reserve for future repair costs on machinery and equipment.
3. The reserve for inventory obsolescence is a new item but reflects the failure of the company to get rid of certain lumber products that have been on the books for almost two years.

Glen counters Jackies explanation as follows.

1. Employees may not take vacation time next year because the employment market is tight and there is an economic recession, so they may not want to leave, even for a week or two, for fear of losing their job.
2. Repairs and maintenance are discretionary expenditures, and there is no reason to accrue for them.
3. The obsolete inventory will be sold to a buyer who is willing to take it off the companys hands so Glen suggests waiting until it is sold at that time for scrap value.

As a CPA, Jackie feels comfortable with her knowledge of the accounting rules. She tries to discuss her differences with Glen using this perspective. She also explains her ethical obligations. Glen simply tells Jackie not to make the entries if she wants to keep her job.

Answer the following:

Put yourself in Jackies shoes, if you are right that the accounting entries should be made, what would be most important to you in deciding what to do in this case?

How would the companys leadership and culture present a challenge? If you are going to blow the whistle, as a CPA, what type of obligations and provisions does she need to be aware? Please reference Exhibit 3.13

Exhibit 3.13

Does the supervisors opinion at the reporting entity organization or at the external audit firm fail to comply with professional standards, create a material misrepresentation of fact, or violate applicable laws or regulations?

Ethical Responsibilities of CPAs to Avoid Subordination of Judgment

Still no adjustment aaadjustment? aadjustmentadjustment? adjustment

Consider the following safeguards to ensure that threats to compliance with Rule 102 are eliminated or reduced to an acceptable level:

• Determine whether internal reporting requirements exist to report differences of opinion
• Determine whether any responsibilities exist to communicate with third parties (i.e., regulatory authorities/employers or former employers external accountant)
• Seek legal advice

No safeguards exist to eliminate or reduce the threats to an acceptable level or appropriate action was not taken

DOCUMENT UNDERSTANDING OF THE FACTS, ACCOUNTING PRINCIPLES, AUDITING STANDARDS, AND APPLICABLE LAWS AND REGULATIONS

Discuss concerns with supervisor about the significant threats to integrity and objectivity

Yes

Bring concerns to higher levels of management of client organization (i.e., senior management/board of directors) or audit firm

No adjustment adjustment

NO ACTION REQUIRED

ADJUSTMENT MADE

END PROCESS

No

• Consider continuing relationship with members organization
• Take appropriate steps to eliminate exposure to subordination of judgment
• Consider resigning position (this may not negate disclosure responsibilities to regulatory authorities or employers/former employers external accountant)