Glenda Shock was excited and somewhat panicked at the same time. Just two months ago, in April, she was promoted to senior auditor at Broder, Sams and Ultig (BSU), a regional full-service accounting firm headquartered in Indianapolis. She was starting her third year with the firm and was on the fast track. Glenda was bright, energetic and out to prove she was better than her peers and friends who took jobs with the large national accounting firms. She had her heart set on working for one of those large firms coming out of college, but now she was committed to her work and to BSU, determined to make partner someday. She had just received an assignment to plan and perform a due diligence engagement for BSU's largest client, ABC Company, a $500 million manufacturer and distributor of household consumer goods based in Columbus, Indiana. ABC Company was in the middle of negotiating to purchase Silko, a $50 million Toronto-based importer of high-quality cutlery from China. Glenda was thrilled to get such high-profile work and couldn't wait to get started. She was also worried about being successful with this opportunity while also meeting her other commitments, primarily audit wrap-up "to-do's" that somehow seem never to get done. When she was promoted, her mentor partner, Debby Quan, had explained that being a senior would challenge Glenda to develop her style to effectively manage others. For the time being, Glenda was being challenged simply to manage herself and juggle priorities. Glenda's first step was to discuss the project with BSU's audit manager, senior manager and partner assigned to ABC Company. She learned that ABC Company was very excited about the opportunity to add the Silko line to its stable. Silko was eager to leverage American's sales and marketing prowess to grow Silko's revenues in the United States. The transaction terms were largely negotiated and, with regulatory approval issues believed to be nonexistent, due diligence was the last major step to complete the deal. Glenda quickly surmised that she didn't have a lot of time and, in fact, was told due diligence needed to be wrapped up by the end of June-only eighteen days away. She also learned that she would get one staff auditor--her choice from whoever was available on the schedule--to assist with the engagement in Toronto. Glenda later met with her audit manager to choose a staff accountant to assist the due diligence effort in Toronto. There were five medium and senior staff accountants available. Glenda picked Jeff Harry, who had just completed his first busy season and was the star of his incoming class. Glenda then scheduled her client visit for the week of June 17. She would spend the remainder of the current week planning the due diligence, bringing Jeff up to speed and completing some of her open wrap-up "to-do's" from her busy-season audits. Glenda and Jeff traveled to Silko on Monday, ready to begin. Glenda had created an extensive due diligence program for ...

1. Glenda Shock was excited and somewhat panicked at the same
time. Just two months ago, in April, she was promoted to senior
auditor at Broder, Sams and Ultig (BSU), a regional full-service
accounting firm headquartered in Indianapolis. She was starting
her third year with the firm and was on the fast track. Glenda
was bright, energetic and out to prove she was better than her
peers and friends who took jobs with the large national
accounting firms. She had her heart set on working for one of
those large firms coming out of college, but now she was
committed to her work and to BSU, determined to make partner
someday.
She had just received an assignment to plan and perform a due
diligence engagement for BSU's largest client, ABC Company, a
$500 million manufacturer and distributor of household
consumer goods based in Columbus, Indiana. ABC Company
was in the middle of negotiating to purchase Silko, a $50
million Toronto-based importer of high-quality cutlery from
China.
Glenda was thrilled to get such high-profile work and couldn't
wait to get started. She was also worried about being successful
with this opportunity while also meeting her other
commitments, primarily audit wrap-up "to-do's" that somehow
seem never to get done. When she was promoted, her mentor
partner, Debby Quan, had explained that being a senior would
challenge Glenda to develop her style to effectively manage
others. For the time being, Glenda was being challenged simply
to manage herself and juggle priorities.
Glenda's first step was to discuss the project with BSU's audit
manager, senior manager and partner assigned to ABC
Company. She learned that ABC Company was very excited
about the opportunity to add the Silko line to its stable. Silko

2. was eager to leverage American's sales and marketing prowess
to grow Silko's revenues in the United States. The transaction
terms were largely negotiated and, with regulatory approval
issues believed to be nonexistent, due diligence was the last
major step to complete the deal. Glenda quickly surmised that
she didn't have a lot of time and, in fact, was told due diligence
needed to be wrapped up by the end of June-only eighteen days
away. She also learned that she would get one staff auditor--her
choice from whoever was available on the schedule--to assist
with the engagement in Toronto.
Glenda later met with her audit manager to choose a staff
accountant to assist the due diligence effort in Toronto. There
were five medium and senior staff accountants available.
Glenda picked Jeff Harry, who had just completed his first busy
season and was the star of his incoming class. Glenda then
scheduled her client visit for the week of June 17. She would
spend the remainder of the current week planning the due
diligence, bringing Jeff up to speed and completing some of her
open wrap-up "to-do's" from her busy-season audits.
Glenda and Jeff traveled to Silko on Monday, ready to begin.
Glenda had created an extensive due diligence program for her
and Jeff to follow. She would spend her time in discussions
with Silko's owner and key managers and helping Jeff establish
support for Silko's financial statements. Jeff was responsible for
gathering detailed financial reports and reconciling them to
Silko's financial statements, including reviewing transactional
support documents.
When they arrived, Silko's owner, Saul Prestby, warmly greeted
Glenda and Jeff. After some initial conversation and a quick
tour, Saul introduced Glenda and Jeff to Silko's accounting
manager, Sheri Landon. Saul had started the business five years
ago after securing the North American distribution rights for the
Silko product line from Tsingto Enterprises in China. Sheri had

3. worked with Saul over the past five years as they grew the
business from less than $1 million in annual revenues to just
over $50 million today.
Saul, Glenda and Jeff went out for lunch to discuss the due
diligence plan and the upcoming week's events. During lunch
Glenda learned that Saul, a successful entrepreneur now sixty-
one years old, had started several businesses with international
ties, the last of which led to his relationship with Tsingto.
Glenda also learned that while Saul was a lifelong Canadian
resident and very much enjoyed life in Canada, he was also
displeased with Canada's taxation policies that, at the margin,
were over 50% for business and individuals. She also noticed
that the restaurant patrons were all paying in cash, as did Saul.
Saul intimated that much business was transacted in cash in
Canada due to the high tax rates. He said that if the
government's taxing policies were more reasonable, more taxes
would ultimately be collected because businesses would employ
fewer tax avoidance schemes. Glenda thought this was
interesting and wondered how Canada's taxes and Saul's views
and actions might affect her due diligence plan.
It was now Wednesday and Glenda and Jeff were well into their
due diligence plan. Clearly Silko was a very profitable business
with simple operations. Glenda was thinking the acquisition
made sense for her client when Jeff approached her. "Glenda,
this is weird. As I look through my inventory work papers, I
have two detailed perpetual inventory listings with the same
date but materially different quantities and inventory values. I
need to discuss this with Sheri. I can tie one of the inventory
listings, the higher one, to the review report issued by their
New York CPA." Glenda thought about this and said, "Yes, Jeff,
let's discuss this with Sheri right away, but let's also keep this
quiet until we can talk to her." Glenda felt it was no accident
Jeff had the two inventory listings, and that Sheri might be
trying to tell them something.

4. When Jeff began asking about the inventory listings, Sheri was
visibly uncomfortable. "Jeff, we made some top-level changes
to the perpetual inventory."
"Okay," Jeff said, "what are the reconciling items to explain the
adjustments?"
"I think you should discuss this with our accountant, Mr.
Kirkpatrick," Sheri told him.
Jeff briefed Glenda, who now knew something was not right.
Glenda stopped by to see Sheri. "Okay Sheri, what's up? You
know we have a problem with the inventory listings. Will you
help me sort it out?"
"Listen Glenda," Sheri replied, "Saul Prestby is a good man.
Sometimes he can be a little too creative in order to mitigate his
tax payments. It is not uncommon in Canada. I really can't
discuss this. That second perpetual listing that you found is all
you need. Talk to Saul and talk to Mr. Kirkpatrick." Then Sheri
handed Glenda a piece of paper. The look on her face said,
"You didn't get this from me." Glenda thanked Sheri and headed
back to her conference room work area.
As Glenda was reviewing the paper she received from Sheri, she
was thinking, "Now things really get interesting." The piece of
paper was a statement for a Silko-owned Swiss bank account
showing deposits from Tsingto. As Glenda checked the due
diligence work papers, she learned that in fact this account was
not included in the assets of Silko. Now Glenda was excited
again but also very anxious. She had clearly uncovered some
troublesome financial transactions that she knew ABC Company
would be interested in, but she was beginning to feel that she
was getting in over her head.
Glenda phoned her audit manager, Tom McCarr. "Tom, I think

5. we have a few problems with Silko. They may be hiding some
income through misstated financials and unreported product
purchase rebates. I really need some help to sort this out.
Silko's CPA is a Mr. Kirkpatrick in New York. I'm pretty sure
he is in the loop on this." Glenda went on to explain all that she
knew. Tom processed Glenda's update and said, "Okay Glenda.
It sounds like you have uncovered some tax avoidance schemes.
Good work! I want you to call Mr. Kirkpatrick and confront him
on these issues. I will call Saul Prestby and discuss our issues
with him. Please do not discuss this with anyone else until we
talk again. Please call me right after you finish your discussion
with Mr. Kirkpatrick. Thanks, and hang in there. You are
handling this perfectly."
Glenda was not looking forward to her call with Mr.
Kirkpatrick. "Mr. Kirkpatrick, I am Glenda Shock from Broder,
Sams and Ultig. We are performing the Silko purchase due
diligence for ABC Company. I think Mr. Proctor said you would
be available as needed." Mr. Kirkpatrick said he was aware of
the ongoing due diligence and would help in any way he could.
"Mr. Kirkpatrick, I have discovered some potential problems
with your last review report and the underlying inventory
values. I have two perpetuals, one significantly higher than the
other, for the financials review date. I discussed this with Sheri
and she asked me to call you. Also, I found a Swiss bank
account statement with deposits to Silko from Tsingto.
According to Silko's financials, this account doesn't exist,
although the statement suggests it has been around since Silko
started."
"Glenda, I understand your questions," Mr. Kirkpatrick said. "I
know they are important for you to resolve to complete your due
diligence. I would like to discuss them in person rather than
over the phone. I will clear my calendar any day next week to
meet with you here in New York." Glenda had hoped there was
a logical and legal explanation for what was going on. She now

6. knew from Mr. Kirkpatrick's reaction that the situation was real
and would not go away. She also had a deadline. "Thanks Mr.
Kirkpatrick, I appreciate your offer. This cannot wait until next
week. I will plan to be in your offices tomorrow morning by 10
a.m. I will see you tomorrow." Mr. Kirkpatrick reluctantly
agreed and the meeting was set.