Case 5-6 Rooster, Hen, Footer, and Burger
Barry Yellen, CPA, is a sole practitioner. The largest audit client in his office is Rooster Sportswear. Rooster is a privately owned company in Chicken Heights, Idaho, with a 12-person board of directors.
Barry is in the process of auditing Rooster’s financial statements for the year ended December 31, 2016. He just discovered a related-party transaction that has him worried. For one thing, the relationship has existed for the past two years, but Barry did not discover it. What’s just as troubling is that the client hid it from him.
Rooster bought out Hen Sportswear two years ago but still operates it as a separate entity, and since then has systematically failed to disclose to the private investors related-party transactions involving the CEO of Rooster, Frank Footer. It seems that Footer is borrowing money from Hen and is deeply in debt to the CEO of that company, who is his brother-in-law. Also, Hen has hired relatives of Footer, most of whom are unqualified for their jobs, and pays them an above-market salary. This has been hidden from Barry as well.
Barry was informed by an anonymous tipster that Rooster operates a secret off-balance-sheet cash account to pay for cash bonuses to senior officers, travel and entertainment expenses and an apartment rental for Footer, and cash and noncash gifts to local government officials to “grease the wheels” when permits need to be expedited in favor of Rooster. Barry doesn’t know what to make of it, because he is too focused right now on the related-party transactions with Hen Sportswear.
Barry is in the process of questioning Hans Burger, CPA, who is the CFO of Rooster, about these transactions. Burger explains that he had raised these issues with Footer but was instructed in no uncertain terms to leave them alone. He did just that. Burger told Barry he needed this job and wouldn’t jeopardize it out of a sense of “ethics.”
Barry is in his office back at the firm and reflecting on how best to handle this matter.
1. What are related-party transactions and the obligations of Barry as the auditor of Rooster Sportswear? Why are related-party transactions a particularly sensitive area?
2. What are Barry’s ethical obligations in this matter? Include in your discussion the issues of concern from an audit perspective and why they should be of concern to Barry in deciding what to do.
3. Assume you are Barry’s best friend and he asks for your advice. What would you tell Barry and why? Use ethical reasoning in developing the advice.
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