SUZETTE

WASHINGTON CASE

Suzette Washington financed her college education by working as an inventory
clerk for Bertolinis. a clothing store chain located in the southeastern USA.
Bertolini caters primarily to fashion conscious young men and women. The
companys store carry a wide range of clothing including casual wear, business
suits and accessories. The Bertolinis store for which Suzette worked is located a
few blocks from the campus of the large state university that she attended.
Except for the management personnel, most of Bertolinis employees are college
students. Suzettes best friend and roommate, Paula Kaye, work for Bertolinis as
a sales clerk. Paula majored in marketing, while Suzette was an accounting
major.

During Suzettes senior year in college, Bertolinis began experiencing
abnormally high inventory shrinkage in the stores three departments that
stocked mens apparel. Suzettes supervisor, an assistant store manager,
confided her that he believed one or more of the sales clerks were stealing
merchandise. Over lunch one day in the student union, Suzette casually
mentioned the inventory problem to Paula. Paula quickly changed the subject by
asking Suzette about her plans for the weekend.

Paula, rewind for just a second. Do you know something that I dont?
Huh? What do you mean?
Missing inventory.shrinkagetheft?

After a few awkward moments, Paula stopped eating and looked squarely into
her friends eyes. Suzette, I dont know if its true, but Ive heard a rumor that
Alex and Matt are stealing a few things each week. Polo shirts, silk ties, jeans.
Occasionally, they take something expensive, like hand-knit sweater or sport
jackets.

How are they doing it?

Ive heard-and dont repeat any of this now-Ive heard that a couple of times per
week. Alex stashes one or two items at the bottom of the trash container beneath
the number two cash register. Then Matt, you know he empties the trash every
night in the dumpster out in the alley, takes the items out and puts them into his
car.

Paula, we cant let them get away with this. We have to tell someone.

No, we arent. Remember, this is just a rumor. I dont know that its true. If you
tell a manager, there will be questions. And more questions. May be the police
will be brought in. You know that eventually someones going to find out who
told. And thenslashed tiredphone call in middle of the night.

So, dont get involved? Dont do anything? Just let those guys keep stealing?

Suze, you work in inventory. You know the markup they put on those clothes.
They expect to lose a few things here and there to employees.

Maybe the markup wouldnt be so high if theft wasnt a problem

Now, there was no doubt in Paulas mind that Suzette was going to report the
alleged theft scheme to management. Two months Suze. Two months till we
graduate. Can you wait till then to spill the beans? Then we can move out of state
before our cars are spray-painted.

One week following Suzette and Paulas conversation, a Bartolinis store
manager received an anonymous typed message that revealed the two person
theft ring rumored to be operating within the store. Bertolinis immediately
retained a private detective. Over a four week period, the detective documented
USD500 of merchandise theft by Alex and Matt. After Bertolinis notified the
police, the district attorney filed criminal charges against the two young men. A
plea bargain agreement arranged by their attorneys resulted in suspended
prison sentences for Alex and Matt. The items of that agreement included making
restitution to Bertolinis, completing several hundred hours of community
service and a lengthy period of probation.

Questions
1. What would you do if you found yourself in a situation similar to that
faced by Suzette in this case?
2. Do you believe that it was appropriate for Suzette to report alleged theft
ring to store manager? Would it have been unethical for Suzette not to
report the rumored theft ring?
3. Briefly explain internal control activities that might have been prevented
the theft losses suffered by Bertolinis.

KOGER PROPERTIES INC. CASE

Becoming a partner with one of the large international accounting firms easily
ranks among the most popular career goals of accounting majors. Michael
Goodbread staked out that career goal three decades ago. After graduating from
college, Goodbread made the first step toward reaching his objective when
accepted an entry-level position with Touche Ross & Company. In February
1973, Goodbread received his CPA license in the state of Florida after passing the
CPA exam. Eight years later, the partners of Touche Ross selected Goodbread to
join their ranks. In December 1989, Goodbread accomplished his career goal a
second time by becoming a partner of Deloitte & Touche, the firm created by the
merger of Deloitte, Haskins & Sells and Touche Ross. Before the merger,
Goodbread served as an audit partner in the Jacksonville, Florida, office of
Touche Ross. Goodbread assumed an identical position with the newly formed
Jacksonville office Deloitte & Touche following the merger.

The six-digit salaries earned by partners of larger international accounting firms
provide them ample discretionary funds for investment purposes. Like many
investors, Goodbread often considered local companies when making investment
decisions. One local firm that caught Goodbreads attention during the late 1980s
was Koger Properties, a real estate developer company headquarter in
Jacksonville. Kogers claim to fame was originating the concept of the office park.
According to a Kogers annual report, the company opened the first office park in
1957 in Jacksonville. By the early 1990s, Koger operated nearly 40 office parks in
two dozen metropolitan areas scattered across the southern USA.

In December 1988, Goodbread purchased 400 shares of Kogers common stock
at a price of USD26 per share. At the time, Koger had approximately 25 million
shares of common stock outstanding.

Following the December 1989 merger creating Deloitte & Touche, one of
Goodbreads assignments with his new firm was supervising the audit of Koger
Properties for its fiscal year ending March 31, 1990. Koger had previously been
an audit client of Deloitte, Haskins & Sells. In his role as audit engagement
partner, Goodbread oversaw all facets of the Koger audit. On February 21, 1990,
Goodbread signed the audit planning memorandum that laid out the general
strategy intended to follow in completing the Koger audit. Several months later,
on June 27, 1990, Goodbread signed the audit report for Koger engagement. The
signing of that document by the audit engagement partner formally completes a
Deloitte & Touche audit.

Goobread dated the unqualified opinion issued on Kogers 1990 financial
statements as of June 11, 1990. Almost exactly one month earlier, on May 10,
1990, Goodbread has sold the 400 shares of Koger stock that he had owned since
December 1988. Goodbread sold the stock at price USD20.75 per share.

The SEC eventually learned that Goodbread held an ownership interest in Koger
Properties while he supervised the companys 1990 audit. The SEC charged that
Goodbreads ownership interest in Conduct of AICPA and generally accepted

auditing standards. Most important, SEC charged that Goodbread caused Deloitte
& Touche issued an improper opinion on Kogers 1990 financial statements.
Instead of the unqualified opinion issued on those financial statements, SEC
maintained that a disclaimer opinion had been required given the circumstances.
Following its investigation of the matter, SEC publicly censured Goodbread.

The embarrassing revelation of Goodbreads ownership interest in Koger
marked the beginning of long series of problems that Deloitte & Touche
encountered with the audit client. In September 1991, Koger filed for
bankruptcy. A short time earlier, Kogers shareholders had filed a large class
action lawsuit against Deloitte & Touche. The suit alleged that the 1989 Koger
audit performed by Deloitte, Haskins & Sells and the 1990 Koger audit completed
by Deloitte & Touche were deficient. Those deficient audits allegedly contributed
to subsequent decline in Kogers stock price.

Questions:
1. The SEC charged that Goodbread violated its independence rules. Explain
the SECs rationale in making those allegations.
2. In your opinion, did Goodbreads equity interest in Koger likely qualify as
a material investment for him?
3. Given that Goodbread purchased stock of Koger in 1988, under what
conditions, if any, could he have later served as the audit engagement
partner for the company.

CHARLES TOLLISON CASE

No, its oke Bea. I will write that memo this weekend and send it to Mr. Fielder.
You go on home.

Are you sure Chuck? I dont mind staying a while longer.

Thanks Bea, but youve already put in too much overtime this week.

After he sent his secretary home, Charles Tollison spent several minutes
shuffling through the audit workpapers and correspondence stacked on his desk
trying to decide what work he would take home over the weekend. Finally only
one decision remained. Tollison couldnt decide whether to take the inventory
file with him. Compulsive by nature, Tollison knew that if he took the inventory
file home, he would have to complete his review of that file, which would
increase his weekend workload from 6 hours to more 12 hours. As he stewed
over his decision, Tollison stepped to the windows of his office and idly watched
the rush hour traffic on the downtown streets several stories below.

It was nearly 6.30 on a Friday evening in early August, Tollison, an audit
manager for a large international firm, has suffered through a tough week. His
largest audit client was negotiating to buy a smaller competitor. For the past two
months, Tollison had supervised the fieldwork on an intensive acquisition audit
of the competitors accounting records. The clients CEO suspected that the
competitors executives had embellished their firms financial data in
anticipation of the proposed buyout. Since the client was overextending itself
financially to acquire the other firm, the CEOs principal concern was the
valuation of the competitors inventory, which accounted for 45% of its total
assets.

The clients CEO had requested that Tollison be assigned to the acquisition audit
because she respected Tollison and the quality of his work. Normally, an audit
manager spends little time in trenches supervising day-to-day audit
procedures. However, because of the nature of this engagement, Tollison had felt
it necessary to spend 10 hours per day, 6 and 7 days per week, poring over the
accounting records of the takeover candidate with his subordinates.

As Tollison stared at the gridlocked streets below, he was relieved that the
acquisition audit was almost complete. After he tied up a few loose ends in the
inventory file, he would turn the workpapers over the audit engagement partner
for a final review.

Tollison tough week had been highlighted by several contentious meeting with
client personnel, a missed birthday party for 8 years old daughter and an early
breakfast Thursday morning with his office managing partner, Walker Linton.
During the breakfast, Linton has notified Tollison that he had been passed over
for promotion to partner-for the second year in a row. The news had been
difficult for Tollison to accept. For more than 13 years, Tollison had been a

hardworking and dedicated employee of the large accounting firm. He had never
turned down a difficult assignment, never complained about the long hours his
work required and made countless personal sacrifices-the most recent being the
missed birthday party. After informing Tollison of the bad news, Linton had
encouraged him to stay with the firm. Linton promised that the following year he
would vigorously campaign for Tollisons promotion including calling in all
favors owed to him by partners in other offices. Despite that promise, Tollison
realized that he had only minimal chance of being promoted to partner the
following year. Seldom were two-time ticketed for promotion.

Although he had hoping for the best, Tollison had not expected a favorable
report from the Partner Selection Committee. In recent weeks, he had gradually
admitted to himself that he did not have a profile for which the committee was
searching. Tollison was not a rainmaker like his friend, Craig Allen, audit
manager, whose name appeared in the roster of new partners. Allen was a
member of several important civic organizations and had a network of well-
connected friends at local country club. Those connections had served Allen well,
allowing him to steer several new clients to the firm in recent years.

Tollison was a technician. If someone in the office had a difficult accounting or
auditing issue to resolve, that individual went first to Tollison. When a new client
posed complex technical issues, the engagement partner always nearly
requested Tollison be assigned to the job. Tollison was mico managed his jobs,
insisting being involved in every aspects of them. To avoid missing deadlines,
Tollison and team would work excessive overtime, including long weekend.

Questions
1. Do you believe Tallison was qualified for partner position?
2. Did the firm treat him fairly? Why or why not?
3. Identify some criteria you believe large firm should use when evaluating
individual for promotion to partner.