Providing a management report for the manager The appendix that provides backing for the advice and is suitable for a colleague accountant Think of this report as your opportunity to notify your manager of what you suggested to the customer and to provide some evidence to support your claims in a condensed form. Maintain coherence, brevity, and brevity of expression

Cariboo Industrial LTD

Cariboo Industrial (CI) Ltd. has been a victim of commercial crime, which has placed the business on the brink of financial collapse. Hechtor, Block, & Jackson (HBJ, a regional accounting furm, has been contracted by the owner's son to operate the business on an interim basis and to conduct an audit of its affairs for the last three years to determine exactly what has taken place, and to make recommendations on what should be done next.

NEW MANAGEMENT

CI was a retail chain specializing in the sale of industrial equipment and supplies to commercial

contractors in British Columbia and Alberta. The business was owned by Martha McMaster, which she founded as a family business in 1978 in partnership with her husband Al Johnson. Johnson died in 1988 in an auto accident, and since then, McMaster has been managing the business alone quite successfully as the sole shareholder.

In early 2001, McMaster suffered a debilitating stroke, which required that she be institutionalized. Her only child, Dr. Frank Johnson, was unable to take over operation of the business due to a demanding medical career as a heart surgeon in Hamilton, Ontario. Jack enables, an experienced executive in the industry, was hired to manage CI for the family and was required to supply financial statements to Johnson each year, along with a written summary of operations.

Venables managed the business and reported to Johnson as contracted.According to the financial statements, the company was very successful in both 2001 and 2002, with all profits being retained to fund future growth. In late September 2003, Johnson received a phone call from one of the office staff indicating that enables had not shown up to work for a week and that no one seemed to know where he was. A police investigation indicated that Venables had left the country, but that his exact whereabouts were unknown.

HBJ TAKES OVER

Johnson was very suspicious of these events and contacted a major accounting fum to provide assistance.HBJ was hired to operate the business until a permanent replacement could be found and to an audit of the company's financial statements for 2001, 2002 and 2003. It was discovered that the auditor, Mary August, who had reviewed the financial statements initially, was the girlfriend of enables, and she had disappeared at approximately the same time

- she was not an employee of HBJ.

In November 2003, Johnson was contacted by HBJ and was told that a cash infusion of $3,913,000 would be needed to keep the business operating. Having power of attorney over his mother's affairs, Johnson arranged for the investment of additional capital.

In late January 2004, HBJ had completed revised financial statements for 2001, 2002 and 2003 (see Exhibit 1) and was about to a memorandum to accompany the statements outlining how they believed enables and the company's previous auditor had embezzled funds. Some key findings included:

• Accounts payable had been "stretched" to the point that many suppliers had cut the company off from any further credit and put them on "cash and carry. Inventory in most of its retail outlets had fallen to such low levels that many customers had taken their business elsewhere. On liquidation, HBJ's experience was that inventory of this type yields only 50 per cent of its book value.
• A considerable amount of sales were made to fictitious companies owned by family members of Venables. The warehouses to which these items had been delivered were found to be empty, and the adjoining office areas abandoned. None of these receivables were written off by HBJ pending further investigation, but the firm did not expect to collect any more than $5 million.
• Large parcels of land were purchased by the company in 2002 and 2003 for expansion, but much of the land was found to be in poor locations. The company was thought to have overpaid by a considerable amount. The previous owners of these lots were still being determined, but the property was expected to be worth only $50 million.

• Venables had given himself unauthorized raises and bonuses and spent lavishly on entertainment and business travel during this tenure as president. He had also negotiated a number of expensive consulting contracts with former business associates to provide guidance on the company's expansion plans.
• By mid-2003, the Calgary Bank (CB) had called CI's line of credit and long-term loans due to a violation of the curent ratio requirement of 1.5 in the previous year. A significant amount of funds were still outstanding, and the bank was contemplating bankruptcy proceedings. The long-term debt was secured by the company's fixed assets.

HBJ futher indicated in the report that the matter should be tuned over to the RCMP Commercial Crime Unit for criminal investigation.

THE MEMORANDUM

Heather Jacobson, CA, CFA, CBV, a partner with HBJ specializing in bankruptcy and corporate

restructuring, had the task of preparing the memorandum to accompany the revised financial statements.

The report had to outline exactly what had taken place at CI over the last three years and make

recommendations to Johnson as to what to do next.

CARIBOU INDUSTRIAL LTD. FINANCIAL STATEMENTS ($000s)

Column1 2001 2002 2003

Sales 22,456 35,000 43,566

Cost of Goods Sold 13,200 22,750 28,563

Gross Profit 9,256 12,250 15,003

Selling and Administration 1,450 2,972 4,911

Depreciation 1,425 3,130 3,607

Income Before Interest and Taxes 6,381 6,148 6,485

Interest Expense 1,101 5,058 5,841

Income Before Taxes 5,280 1,090 644

Income Taxes 1,848 382 225

Net Income 3,432 709 419

2000 2001 2002 2003

Current Assets

Cash 142 904 583 159

Accounts Receivable 2,490 4,300 6,786 14,216

Inventories 3,362 3,952 3,500 3,650

Prepayments 57 469 329 0

Total Current Assets 6,051 9,625 11,198 18,025

PP&E 18,921 23,055 77,640 91,000

Less: A/D 4,288 5,713 8,843 12,450

Net PP&E 14,633 17,342 68,797 78,550

Total Assets 20,684 26,967 79,995 96,575

Current Liabilities

Accounts Payable 1,594 1,594 12,341 18,880

Line-of-Credit 1,676 1,351 7,007 0

Current Portion of LT Debt 1,104 1,789 7,018 67,041

Total Current Liabilities 4,374 4,734 26,366 85,921

Long-term Debt 6,738 9,716 41,921 0

Shareholders' Equity

Common Shares 5,707 5,707 5,707 9,620

Retained Earnings 3,865 6,810 6,001 1,034

Total Liabilities and Equities 20,684 26,967 79,995 96,575