Mark
S. Beasley, Frank A. Buckless, Steven M. Glover, Douglas F. Prawitt
Background
Mark
glanced up at the clock on his office wall. It read 2:30 P.M. He had
scheduled a 3:00 P.M. meeting with George “Hang-ten” Baldwin, chief
executive officer of Surfer Dude Duds, Inc. Surfer Dude specialized in
selling clothing and accessories popularized by the California “surfer”
culture. Mark had served as audit partner on the Surfer Dude Duds audit
for the past six years and was about ready to wrap up this year’s
engagement.
He
enjoyed a strong client relationship with George Baldwin, who was
ordinarily a relaxed and easygoing man, now going on 50 years of age. For
several years, Mark had received a personal invitation from George to
attend a special Christmas party held only for George’s employees and
close associates. Mark considered George a good friend.
In
his six years on the audit, Mark had never had any reason to give anything
but a clean audit opinion for Surfer Dude Duds, Inc. But this year was
different. The economy was in a mild recession, and given the faddishness
of clothing trends, Surfer Dude’s retail chain was hurting. As sales
decreased, Surfer Dude was struggling to meet all its financial
obligations. Retail analysts foresaw continuing hard times for clothing
retailers in general, and current fashion trends did not seem to be moving
in Surfer Dude’s direction. As a result, Mark was beginning to doubt
Surfer Dude’s ability to stay in business through the next year. In fact,
after conferring with the concurring partner on the audit, Mark was
reluctantly considering the addition of a going-concern explanatory
paragraph to the audit report. When Mark broached this possibility with
George several weeks ago, George brushed him off.
The
purpose of the scheduled 3:00 meeting was to inform George of the decision
to issue a going-concern report and to discuss the footnote disclosure of
the issue. Mark rehearsed what he was going to say several times, but he
remained uneasy about the task before him.
When
Mark arrived at George Baldwin’s office, a secretary greeted him and told
Mr. Baldwin of Mark’s arrival. When Mark heard George say, “Send him in,”
he took a deep breath and headed into George’s office with a smile on his
face. George was sprawled out in a large executive chair, with his
ever-present smile. Mark always marveled at how a person could invariably
seem so relaxed and happy. “Hey Mark, what’s up? You know I don’t like
meetings on Friday afternoons,” George yawned.
“Well George, I’ll
get right to the point. As you well know, the retail clothing market has
really gone south the past few months. I know I don’t need to tell you
that Surfer Dude is struggling right now.”
“I
know, but we’ll pull out of it,” George insisted. “When you fall off,
you’ve got to climb right back on to ride the next monster, right? We
always manage to come out on top. We just need to ride this one out, just
like the other times we’ve struggled.”
“George, I know you
have high hopes that things will get better soon, but this time things are
a little different,” Mark sighed. “I know that you might just be able to
pull the company out of this. But given the circumstances, I think we’re
going to have to look at including a going-concern explanatory paragraph
in the audit report. I substantially doubt that Surfer Dude will be able
to continue as a going concern for the next year. I also recommend that
you include a footnote in your financial statements to the same
effect.”
“What? Mark, you
can’t go slapping a going-concern report on me! Surfer Dude will go
belly-up for sure. No one will be willing to loan us any money. Shoot,
nobody will even be willing to sell us anything on account—all our
inventory purchases and everything else will be C.O.D. It’ll be
cash-and-carry only. And what about our customers? Will they buy if
they’re not sure we’ll be there to stand behind our return policy? It’ll
be your report that puts us under, not the ripples we’re hitting now. I’ve
got a feeling things are going to get better soon. We just need a little
more time.”
“George, you’ve got
to consider the consequences if....”
“Mark, if you slap
me with a going-concern report, there is no way we’ll be able to pull out
of this. Think of all the people who will lose their jobs if Surfer Dude
shuts down. Please, I’m asking you to at least think about it.” George’s
ever-present smile was gone.
Mark
was silent for what seemed like an eternity. “Okay George, let’s both
think about it over the weekend. I’ll drop by on Monday morning so we can
work this out. Thanks for your time.”
Mark
walked slowly out of the building and to his car. This was not going to be
a relaxing weekend.