Big Oil versus Big Ideals The Case Part I: After graduating from a large southwestern university in 1995 with a degree in accounting, George began his career at a Big-4 public accounting firm. He worked his way up to audit senior manager before taking a position in the spring of 2005 at a Fortune-500 company (“the Corporation”) as Director of Technical Accounting Research and Training. George was directly responsible for supervising, evaluating, and improving technical research and training for the entire finance and accounting (“F&A”) organization. During his job interview, the Corporation’s Senior Vice President and Chief Accounting Officer (CAO) emphasized that the Corporation had recently faced questions about its accounting practices and needed to „clean up? its accounting. They were looking for someone to keep abreast of SEC and FASB rules and train their in-house accountants at locations throughout the world. George was aware of the negativepublicity surrounding the Corporation’s accounting practices, and was wary of their offer. Despite his concerns, based on the CAO?s statements, George thought the job sounded like a great opportunity to „fix a company in need.? Besides, although George did not know them personally, several other former auditors from his firm worked at the Corporation. Similar to a consultation partner in the national office of a public accounting firm, George was the „go-to? person for questions about proper application of GAAP at the Corporation. His job took him across the globe. Some of his presentations focused on accounting for joint ventures, while others taught proper application of GAAP in revenue recognition. His technical presentations were well-received by the Corporation?s accountants, who were eager to learn about appropriate treatment of unique, industry-specific transactions and FASB developments. Individual accountants at the Corporation came to George with their questions and he felt that they valued his opinion. In summer 2005, George reviewed the Bill-and-Hold decision tree the Corporation used to determine timing of revenue recognition. (The decision tree actually violated the Corporation?s written policy on revenue recognition.) George concluded they were recording revenue prematurely, based on an improper application of GAAP (the SEC?s SAB104 and EITF- 0021). In short, as part of service contracts with their clients, the Corporation was required to manufacture custom-designed equipment in order to actually perform the required services for their customers. The equipment was manufactured in advance by the Corporation and stored in their warehouses until the service was performed. The Corporation recorded the sale of the equipment when it was manufactured and placed in the warehouse, before it was used in the service. George considered this treatment to fit the characteristics of a classic Bill–and-Hold scheme, which can result in improper acceleration of revenue recognition. Prior year emails and documents from Internal Audit raised concerns that this practice did not comply with company policy. The same documents made it clear the Corporation responded by adding a clause to their purchase orders in an effort to evidence the passing title of such manufactured repair equipment to the customer at the time the purchase order was issued, although the company?s policy was never changed. Thus, accounting practice remained out of compliance with GAAP. In fact, the passage of title or risk of loss is only one of the seven bill-and-hold criteria, all of which must be met in order to recognize revenue. In addition, the title passage clause did not change prior contracts, whose revenue had already been recorded. George did some additional research and found an article on Bill-and-Hold in the industry, written by a manager at the Corporation?s external audit firm. Based on his understanding of company practices and his research, George published an internal memo describing his findings; he also sent a copy to the audit firm’s engagement team. The Corporation responded by conducting a survey to analyze the materiality level of the questionable transactions. According to George, they found the issue was widespread and material, as it was 20-25% of total revenue. The third quarter was coming to a close and the external auditors were onsite. George discussed the issue with both the Chief Accounting Officer and the audit engagement manager. Both assured him the Corporation would restate revenue and correct the error. However, when the quarterly financial statements were issued, there was no correction or restatement. George was surprised, but received no explanation. The controller, George?s boss, left the Corporation soon after and the CAO refused to meet with George to discuss the matter. Faced with a dilemma, George considered his choices. He could go along with the Corporation?s treatment and let the issue drop. In other words, he could „take no action,? keep his job, and continue to train the Corporation?s accounting staff. He could resign and find work at a different organization, leaving the Corporation to continue to file what George felt were inaccurate statements to the public. Alternatively, George could continue working within the Corporation, trying to gain support for his concerns internally. Last, George could pursue the issue and report his concerns externally, either to a regulatory body or to the media. George carefully weighed his options. He had not faced a dilemma this serious in the past. His actions would affect his career, his family, the Corporation, and even the investing public. He took his wife and children on a short trip. He thought about the situation and asked himself, “What would my dad do?” In his heart, he just wanted the company to change its accounting practice, but he had been unsuccessful at this. In addition, the external audit manager knew of the situation, agreed with George, and still the audit firm gave the statements a clean opinion. George made a decision. Part II: Georges position: George continued in his attempts to persuade the Corporation to modify their practices, to no avail. Finally, in November 2005, after the Corporation had filed its third-quarter financial statements with no revised revenue recognition policies, George sent a confidential email to the SEC and the PCAOB, outlining his concerns and implicating the CAO and external auditors. The SEC interviewed George about the Bill-and-Hold practice. After the Corporation filed their 2005 annual financial statements, the SEC opened an inquiry into their reporting practices. According to George, the SEC also encouraged him to contact the Corporation’s audit committee. On February 4, 2006, George learned the Corporation had been contacted by the SEC and so he sent what he believed would be a confidential email, outlining his concerns, to the audit committee via a link on the company?s webpage. George was not prepared for what happened next. The Corporation hired a law firm to investigate the Bill-and-Hold practices; after approximately 5-6 months, they reported that any issues with improper revenue recognition were immaterial to the company?s financial statements. The SEC also closed their case. Meanwhile, contrary to promises made on the website, the legal department, rather than the Board of Directors, was first to receive George?s email. The General Counsel forwarded the email to the Chief Financial Officer, who shared it with others including the VP of Investor Relations, the Chief Accounting Officer, and the external audit partner. The CAO then sent emails to others in the company identifying George and his complaints to the SEC and company hotline; he further instructed his staff to investigate whether George had violated the company?s Code of Business Conduct by contacting the SEC. The audit committee eventually also received the email. When the SEC notified the Corporation they were opening an investigation of accounting practices, the General Counsel sent out an email notifying key individuals the SEC was investigating “George?s complaint”; this email was shared widely throughout the organization. Disclosure of George?s email to these parties resulted in retaliation in many forms. George was shunned by Corporation employees. The Corporation?s executives excluded him from all meetings with the external auditor, removed him from major projects and, worst, they took away his training responsibilities. With his job decimated, he asked to go on administrative leave. Stunned by the Corporation?s actions, George sent the SEC a 50 page report with over 100 exhibits detailing the accounting practices he felt were questionable. He supplied his estimates of the amount in question, which he later found out were much larger than those the Corporation had reported to the SEC. George did not meet with the SEC until March 28, 2006. About the same time, April 1, 2006, George agreed to a 6-month administrative leave of absence from Corporation. In September, the Corporation notified George his leave would expire at the beginning of October and they expected him to return to work. George believed the Corporation had not provided the SEC with enough evidence about the case, and that the SEC?s decision to close the case was based on incomplete evidence. The Corporation refused to allow George to have access to their final report to the SEC. On October 17, 2006 George submitted his resignation and retained his own counsel. In his letter of resignation, George stated, “I have every reason to believe that the Corporation intends to persist in violating securities laws and filing inaccurate and misleading financial information. Professionally and ethically, I cannot return to active employment under these conditions.” The Corporation had informed him that when he returned to work in October, he would be reporting to someone at his own level. In addition, the conditions that existed before his leave would persist. He would not be placed back on projects, he would continue to be excluded from meetings, and he would not be able to train in-house accountants. He would not be able to meet with the external auditors, who George was told refused to include him in their meetings, which precluded him from carrying out his responsibilities as the company contact person in regard to accounting policy. George believed all of these changes were retaliation for his whistleblowing actions. The Corporation?s Position: Although company personnel initially did not disagree with George?s concerns, they did ask for further analysis of the issue in the fall of 2005. Because the person to whom he reported, the CAO, felt George had invested too much time and effort on this one accounting issue, they asked a senior accounting manager to perform the analysis (who did not consult George during this process) and this individual arrived at a conclusion opposite to George?s position. George?s superiors were also concerned about George?s leadership, stating that he was not collaborative or acting in the best interest of the company. The Corporation further investigated the accounting issue by asking their internal lawyer (from the U.K.) to consider the issue. That attorney concluded the accounting treatment met revenue recognition requirements. The SEC investigated George?s claim and formally notified the Corporation in September of 2006 that no enforcement action was being recommended. The Audit Committee ’s investigation likewise concluded that no changes in the company ’s accounting practices were needed. Epilogue Between May 2006 and September 2011, George pursued his cause through the US Court system. The Sarbanes-Oxley Act (SOX) was the prevailing regulation protecting whistleblowers at the time. Under SOX, George claimed he whistle blew in good faith and the Corporation retaliated against him. The retaliation included the disclosure of his identity to other employees and constructive discharge from his job. George lost his initial case and the Department of Labor (DOL) Administrative Law Judge dismissed his appeal. After these losses, George?s attorney gave up, but George did not. He put together a petition for review and submitted it to the DOL Administrative Review Board (ARB). In September 2011, the ARB ruled that George was protected under SOX, and the Corporation did retaliate against him. They remanded the case back to the lower court. After more back-and-forth between the courts, he was notified in early 2013 of the appeal courts? finding in his favor. This was a landmark decision that took George years to reach. George has also moved on professionally; he is employed as an accountant again and despite his long and arduous journey, feels he has been able to effect positive change for future whistleblowers. While you may never come across as serious a situation as George has, you will likely encounter situations where accounting judgments and decisions appear unclear. You may have to make a choice to stay, go, or whistle blow. It is beneficial to consider what you might do in such a situation, before the situation presents itself. Below are some discussion questions and exercises that can help you develop a strategy and perhaps lessen the chance you will find yourself in a dilemma like George’s.
1. Research a recent (past 2 years) whistleblower case. Summarize the details of the case, including its resolution, if known. Identify and discuss key factors that influenced the whistleblower’s actions. Consider the individual’s personal characteristics, the corporate culture, and the subject of the whistleblower’s report.
2. visit the SEC and PCAOB websites. Locate each agency’s confidential hotline and analyzed and evaluate their policies regarding their hotline use.
Your answer to the first Individual Exercise (Researching a recent whistleblower case) should be a minimum of two pages in length, double-spaced, including the following bold headings: Name of the case; date(s) of the case; summarize the details of the case, including it’s resolution (if known); identify and discuss the key factor(s) that influenced the whistleblower’s actions, including the individual’s personal characteristics and the corporate culture, if relevant, to the case you have chosen to analyze.
For the second Individual Exercise, in addition to answering the questions, provide in your submission a hyperlink to the SEC and to the PCAOB websites where you found the information required and which you included to answer the Exercise requirements.