Do you think this is limited to just one quarter? Dr. Mitchell asked.
I think so the caller replied. As I mentioned I joined the company three
and a half months ago. One of my first tasks involved closing out the prior fiscal year
and assisting the external auditors with the year-end audit. As best I can tell these
unusual activities began just recently given our poor results in the first quarter of this
year. Our company is a start-up enterprise that has been operating at a net loss for a while.
Just last week the bank stopped clearing checks drawn off the company
account. They weren't necessarily bouncing them but they were not funding the line of
credit until the first quarter results were presented on Friday. Interestingly the bank
immediately started funding the line late Friday and I understand based on phone calls
with my staff this morning the bank is continuing to fund the line this morning. I really
Case-5 The Anonymous Caller: Recognizing It's a Fraud and Evaluating What to Do
think the earnings misstatements first occurred this quarter and that the prior year
audited financial statements are not misstated. Unfortunately I had to sign a bank
commitment letter only two weeks after joining the company. That commitment letter
related to funding the loan right at the close of the last fiscal year. So my signature is
on file at the bank related to prior-year financial results. But given the current events I
refused to sign the documents delivered to the bank on Friday. One of my accounting
clerks resigned last week due to similar concerns. Our vice president of human
resources (HR) discussed the resignation with me after learning about the clerk's
concern during a final exit interview. I might add however that the HR vice president
is the wife of the CEO
Anyway I'm just not sure what responsibilities I have to disclose the earnings
misstatements to outside parties. I am considering all sorts of options and thought
I would see what advice you could offer. What do you think I should do Dr.Mitchell?