Case 1: Conservative Recognition or Cookie Jar Reserves

Case 1: Conservative Recognition or Cookie Jar Reserves

Case 1: Conservative Recognition or Cookie Jar Reserves

SUMMARY OF THE FACTS

Parties Involved:

1. Aunt Amelia - Founder of O’Brian Software, Nick’s aunt and inexperienced in accounting

2. Nick O’Brian - Junior Internal Auditor, recently college graduate, nephew of the

3. Lee Marchetti – Chief Financial Officer of O’Brian Software,

After recently graduating college two months prior, Nick O’Brian is hired as a Junior Internal Auditor for his Aunt Amelia’s company, O’Brian Software. O’Brian Software has been in operations for five years and is a multi-million dollar publicly traded company that provides both software and consulting services to its clients. Although this is Nick’s first position at the company, he’s been involved since the very beginning of this family venture, since family members owned the majority of the stock. Realizing “her specialty is software, not accounting “, Aunt Amelia hires Lee Machete to be Chief Financial Officer (CFO) of O’Brian Software after the firm’s initial public offering (IPO) three years ago. Nick notices a significant amount of unearned revenue the balance sheet and wonders if O’Brian Software is being overly conservative in estimating the amount of deferred income. After having a difficult understanding the firm’s methodology for revenue recognition, Nick decides to talk to Marchetti.

In the meeting with Marchetti, Nick states what worries him. “Overly conservative reporting could leave the impression we’re trying to create cookie jar reserves.” Machete assures Nick that based his judgment the firms accounting practices are sound, has proper documentation, and meets the Securities Exchange Commission (SEC) requirements. Nick later meets with his Aunt Amelia to convey his concern. Since Marchetti never mentioned these concerns to her, Aunt Amelia doesn’t understand the problem. She feels confident that as long as the firm isn’t...