Rachel Varley
Weston Smith
Courtney Bouchez
ACC 4313
9/4/15
W. R. Grace vs. SEC
W. R. Grace trouble all started in the early 1990’s. W. R. Grace is a catalyst manufacturer, they specialize in petroleum refining and chemical processing catalysts. The relatively successful company had run into some unexpected spike in profits. The executives knew that they could not keep up this growth and eventually the profit would decrease again and investors would be concerned. So instead they decided to take the 30% growth and stash it in a secret fund, they participated in profit management. The way W. R. Grace justified this was they decided it was immaterial and it would not influence the investor’s decisions. PwC, an external public auditing firm came into W. R. Grace to do their annual report, while going over the numbers they discovered the hidden profit. PwC repeatedly told W. R. Grace that it was wrong, and mentioned it in their memos, but ultimately gave W. R. Grace a clean report, and signed it. Mr. Eatough the company 's, internal audit chief grew concerned and did not feel right about the profit management. Several internal auditors and the even a few PwC auditors discussed the issue and lack of controls, and all concluded it was not right. So Mr. Eatough decided that it was time to discuss this problem with the internal audit committee, once before them he brought up the "deliberate deferral of reporting of income." He did not call it fraud however because he was afraid that if he did he would be fired. Once the committee’s lawyer talked to PwC and they came to the conclusion again that these hidden profits were not material, the committee dismissed Mr. Eatoughs concerns. About a year later Mr. Eatough was indeed fired. Believing he was wrongly fired Mr. Eatough filed a whistleblowing case with the SEC. If Mr. Eatough had turned to the Code of Ethics for guidance, he would have received valuable advice while reviewing the Integrity and Competency sections of its framework. In the Integrity section, statement 1.2 states that an auditor “shall observe law and make disclosures expected by the law and the profession” (textbook). This statement is of extreme relevance to Mr. Eatough’s dilemma due to the fact that the FASB’s Statement of Financial Accounting Concepts implicitly states that for information “to be useful” it “must be reliable as well” (fasb.org). Furthermore, when section 1.2 states the auditor should “make disclosures” that are “expected” by “the profession” (textbook), the materiality of W.R. Grace’s “profit management” can be questioned even further. While the “law doesn’t disclose any information of what is expected in terms of materiality involving net income, the accounting profession does. Generally speaking, the accounting profession expects any fluctuation exceeding 10% to be considered material (and thus not considered accurate). Under this guideline, W.R. Grace’s profit management would have been considered material, which would have assisted Mr. Eatough’s confidence that outright fraud was occurring. Statement 1.4, another statement pertaining to integrity, says that an auditor “shall respect and contribute to the legitimate and ethical objectives of the organization” (textbook). W.R. Grace was failing to accomplish this at this time. W.R. Grace states that they are “committed to delivering value, safely and sustainably, to our shareholders” (grace.com), yet the deliberate falsification of revenue recognition argued otherwise. Mr. Eatough should not have allowed W.R. Grace to defy their ethical objectives by standing strong in the argument …show more content…
Grace case are 2060: Reporting to Senior Management and 2440: Disseminating Results. 2060 discusses the requirement of the chief audit executive to “include [all] significant risk exposures and control issues, including fraud risks, governance issues, and other matters” when reporting to “senior management and the board (Textbook).” Mr. Eatough purposefully evaded reporting an issue of fraud by downgrading the severity of the company’s situation and avoiding the use of the word fraud altogether in his final report to the CFO. 2440 requires the chief audit executive to essentially approve “final communication” at the end of an “engagement” and “deciding to whom and how it will be disseminated (International).” These two specific standards were chosen because Mr. Eatough directly and completely violated both when he simplified his report on fraud to the
Weston Smith
Courtney Bouchez
ACC 4313
9/4/15
W. R. Grace vs. SEC
W. R. Grace trouble all started in the early 1990’s. W. R. Grace is a catalyst manufacturer, they specialize in petroleum refining and chemical processing catalysts. The relatively successful company had run into some unexpected spike in profits. The executives knew that they could not keep up this growth and eventually the profit would decrease again and investors would be concerned. So instead they decided to take the 30% growth and stash it in a secret fund, they participated in profit management. The way W. R. Grace justified this was they decided it was immaterial and it would not influence the investor’s decisions. PwC, an external public auditing firm came into W. R. Grace to do their annual report, while going over the numbers they discovered the hidden profit. PwC repeatedly told W. R. Grace that it was wrong, and mentioned it in their memos, but ultimately gave W. R. Grace a clean report, and signed it. Mr. Eatough the company 's, internal audit chief grew concerned and did not feel right about the profit management. Several internal auditors and the even a few PwC auditors discussed the issue and lack of controls, and all concluded it was not right. So Mr. Eatough decided that it was time to discuss this problem with the internal audit committee, once before them he brought up the "deliberate deferral of reporting of income." He did not call it fraud however because he was afraid that if he did he would be fired. Once the committee’s lawyer talked to PwC and they came to the conclusion again that these hidden profits were not material, the committee dismissed Mr. Eatoughs concerns. About a year later Mr. Eatough was indeed fired. Believing he was wrongly fired Mr. Eatough filed a whistleblowing case with the SEC. If Mr. Eatough had turned to the Code of Ethics for guidance, he would have received valuable advice while reviewing the Integrity and Competency sections of its framework. In the Integrity section, statement 1.2 states that an auditor “shall observe law and make disclosures expected by the law and the profession” (textbook). This statement is of extreme relevance to Mr. Eatough’s dilemma due to the fact that the FASB’s Statement of Financial Accounting Concepts implicitly states that for information “to be useful” it “must be reliable as well” (fasb.org). Furthermore, when section 1.2 states the auditor should “make disclosures” that are “expected” by “the profession” (textbook), the materiality of W.R. Grace’s “profit management” can be questioned even further. While the “law doesn’t disclose any information of what is expected in terms of materiality involving net income, the accounting profession does. Generally speaking, the accounting profession expects any fluctuation exceeding 10% to be considered material (and thus not considered accurate). Under this guideline, W.R. Grace’s profit management would have been considered material, which would have assisted Mr. Eatough’s confidence that outright fraud was occurring. Statement 1.4, another statement pertaining to integrity, says that an auditor “shall respect and contribute to the legitimate and ethical objectives of the organization” (textbook). W.R. Grace was failing to accomplish this at this time. W.R. Grace states that they are “committed to delivering value, safely and sustainably, to our shareholders” (grace.com), yet the deliberate falsification of revenue recognition argued otherwise. Mr. Eatough should not have allowed W.R. Grace to defy their ethical objectives by standing strong in the argument …show more content…
Grace case are 2060: Reporting to Senior Management and 2440: Disseminating Results. 2060 discusses the requirement of the chief audit executive to “include [all] significant risk exposures and control issues, including fraud risks, governance issues, and other matters” when reporting to “senior management and the board (Textbook).” Mr. Eatough purposefully evaded reporting an issue of fraud by downgrading the severity of the company’s situation and avoiding the use of the word fraud altogether in his final report to the CFO. 2440 requires the chief audit executive to essentially approve “final communication” at the end of an “engagement” and “deciding to whom and how it will be disseminated (International).” These two specific standards were chosen because Mr. Eatough directly and completely violated both when he simplified his report on fraud to the