The work could be very challenging. Anonymous Company consisted of a series of more than twenty small businesses owned in part or in full by the Green family. The businesses were interrelated in that one business, run by one member of the family, would be involved in one stage of a project and another business, run by another member of the family, would be involved in another. Funds would flow from one segment to another depending on the stage of the projects. Several of these projects involved government financing. As controller, Nolan would be expected to see that the books for all the interrelated businesses were kept correctly, that incomes and expenses were assigned properly, and that government requirements were met.

As is not unusual, it was especially important and difficult to make sure that the government work was properly documented. One of the factors that added to the difficulty was that the agency concerned with financing Anonymous Company's projects would allow only a certain percentage of profit on each project. It was actually in conjunction with this government work that Nolan had become acquainted with Anonymous Company. Nolan had been involved in a review that was designed to ensure that Anonymous Company was following all the proper government guidelines. The review was done carefully in accordance with government agency standards and no problems were found.

Not long after starting work, Nolan noticed that a number of checks made out to an outside consultant and billed to the government work were endorsed over to one of the Schedule C units of the business and regularly deposited in the account of that unit. The consultant did, in fact, do work for the concern and was paid by the firm for his work. Such work and such charges were ordinary and customary in Anonymous Company's line of business. But Nolan discovered that a significant number of checks (totaling approximately $225,000) made out to the consultant were being deposited in the account of the most volatile of the business units. Profits for this unit were in excess of $4,000,000.

The bank had asked for second signatures on only about two out of fifty checks made out to the consultant and deposited in the Anonymous Company unit's account. The deposits were recorded on Anonymous's books as donated capital. Nolan was instructed not to send the consultant a 1099 form.

Nolan, wanting to clear up the apparent contradictions in the process and assuming that there was a logical explanation, approached one of the family members/unit managers for information. The manager admitted quite freely that they were adding the consultant's fee to the costs associated with the government projects and a secretary was writing the signature of the consultant on the checks. The manager was not a particularly sophisticated business person and seemed to see nothing particularly wrong with the practice.

Nolan went to the family member who was managing the unit receiving the funds and that member simply referred Nolan to the family member who had the greatest authority for the overall business. Nolan approached this person with the information and was told that it was necessary to do this to survive and that if a problem were to develop that it would be "handled when it got there. As the manager had considerable political clout, it might be quite true that it could be handled.

Nolan insisted that the unit show the funds from the checks as income, convincing the manager that a tax audit would be certain to question regular infusions of donated capital. Beyond that, Nolan did not know what to do. Revealing the information to the government agency would be likely to stop its occurrence, but it might have several other consequences as well. If it escalated to a full-blown court case, those who were responsible would be punished, but so would a number of people who had nothing to do with the issue. If, on the other hand, the owner's political pull was sufficient to hush the whole issue, Nolan would have sacrificed a job and possibly a career for no real results.

One of the steps that Nolan thought was immediately appropriate was, as a professional courtesy, to talk to one of the partners of Smith, Jones, & Brown to warn them of the risks associated with having Anonymous Company as a client. The response was confusing. The partner appeared to resent the visit. The assumption seemed to be that Nolan was wanting a job or was expecting some sort of reward. One thing that Nolan may have expected, but didn't get, was guidance on what the next step should be.

In Nolan's college classes, ethics were discussed, but those discussions nearly always centered around the ethics associated with being a member of a public accounting firm. Confidentiality was one of the ethical cornerstones. Nolan had serious questions about whether it was a breach of confidentiality to go to anyone outside the business with the information. What's more, there was a very real chance that nothing would ever be done.

Nolan took the most direct approach and went to the guiding force behind the business. In clear terms, Nolan communicated that the procedures that were being done were not what would be considered appropriate and that they would not continue under Nolan's tenure as controller. The upstanding community member said, "Well, you know where the door is." Nolan submitted a notice of resignation, worked out a month's notice, and left the firm behind.

QUESTIONS

1. What is the nature of the specific practice at Anonymous Company that raised the greatest concern for Page Nolan? Why is this a questionable practice? What purpose does it serve for the owners? What group or groups would have the most serious objections to the practice?

2. What are some alternatives that a principled CPA can consider when he/she discovers that an employer is engaging in these practices? Did Nolan do everything reasonably possible?

3. Was it appropriate for Nolan to go back to Smith, Jones & Brown and ask one of the partners for advice? Was this a violation of confidentiality?

4. Did the partner give an appropriate response to Nolan? Should he have done more?

5. What risks, rather than the obvious immediate financial loss, does Nolan take by resigning from this job? What risks would Nolan take by continuing to act as the controller for Green?

6. Should Nolan have resigned? If you knew more about Nolan's financial situation, would that make a difference in your answer?

7. Should Nolan have done more? Should Nolan report this practice to the appropriate governmental agency?

Copyright 1996 by the American Institute of Certified Public Accountants (AICPA). Cases developed and distributed under the AICPA Case Development Program are intended for we in higher education for instructional purposes only, and are not for application in practice. Permission is granted to photocopy any case(s)for classroom teaching purposes only. All other rights are reserved. The AICPA neither approves nor endorses this case or any solution provided herewith or subsequently developed.