AICPA Case Development Program Case No. 93-11: RUN, Inc. ♦ 1 ____________________________________________________________________________________________ Copyright 2001 by the American Institute of Certified Public Accountants (AICPA). Cases developed and distributed under the AICPA Professor/Practitioner Case Development Program are intended for use in higher education for instructional purposes only, and are not for application in practice. Permission is granted to photocopy any case(s) for classroom teaching purposes only. All other rights are reserved. The AICPA neither approves nor endorses this case or any solution provided herein or subsequently developed. RUN, INC.: A CASE STUDY ON THE RESPONSIBILITIES OF ACCOUNTANTS IN INDUSTRY* (Year 2001 Update) Prepared by the American Accounting Association Committee on Liaison with the Securities and Exchange Commission Committee Membership, 1992-1993. Thomas R. Weirich, Chair, Central Michigan University James C. Flagg, Texas A&M University Marcia S. Niles, University of Idaho Robert W. Rouse, College of Charleston Robert J. Sack, University of Virginia, Darden School Jack E. Wilkerson.- Jr. , Wake Forest University Committee Membership, 1993-1994. Robert J. Sack, Chair, University of Virginia, Darden School Dan S. Dhaliwal, University of Arizona Robert Eskew, Purdue University, Krannert School Jack Krogstad, Creighton University Marcia S. Niles, University of Idaho Thomas R. Weirich, Central Michigan University With the assistance of practitioners in industry and public practice: From the industry side, Mr. Lawrence D. Handler, member of the AICPA Professional Issues Subcommittee of the Members in Industry Executive Committee and active in the development of the new ethics interpretations cited in the Teaching Notes for this case. From the public practice side, Mr. Lynn Turner, partner in the Denver office of Coopers & Lybrand and former SEC practice fellow. ____________________________ *This case was prepared by the American Accounting Association's Committee on Liaison with the Securities and Exchange Commission, to provide a basis for class discussion. The case is based on issues raised in SEC enforcement actions, and on general business experience, but the facts have been disguised.AICPA Case Development Program Case No. 93-11: RUN, Inc. ♦ 2 The work of preparing the 2001 financial statements for RUN, Inc. was largely complete and the company's controller, Martin Field, recognized that this final reading of the draft statements was a critical time. Once the statements were released to the printer and distribution was begun there would be no chance for second thoughts. He had been on the job at RUN for only five months, but they had been the most tumultuous months of his career. Now all of that tumult was coming down to this single February afternoon. He was proud of the work he had done in cleaning up the company's balance sheet, and he had satisfied himself that there would be no more unpleasant surprises in that area. He had also pretty well convinced himself that the compromise that had been developed by the CEO, for the presentation of the income statement, was acceptable - but compromises had always made him uncomfortable. It was soon going to be time to accept that compromise or do something else, although what the something else might be was not really clear. THE COMPANY RUN, Inc. manufactured and marketed a variety of products and parts for automobiles, from starters, alternators and brakes to complete replacement interiors. The company had originally been known as Rebuilt and Used Auto Parts, Inc. but the acronym RUN had been adopted as the company's name when the product line was expanded to include new replacement parts and other auto accessories. Sales had been good during the early 1980's as interest rates and credit problems discouraged people from buying new cars and encouraged them to repair and rehabilitate their existing cars. The strong economy of the 1990’s had a perverse impact on the company, as people began to worry less about preserving their older cars; and, intense foreign competition magnified the impact of what would otherwise have been a normal cyclical downturn. When the company went public in the 1980’s (on NASDAQ) the stock had done reasonably well. However, the market’s recent focus on high tech issues had left the company’s share price in the dust. (Earnings data and stock price activity for the period 1997-01 is detailed in Exhibit 1.) The company sold its products primarily to independent and chain auto parts retailers in the Southeast. Most of the products in the company’s line were either rebuilt from parts that had been scrapped or were manufactured by RUN to meet original equipment specifications. The Company also sold parts and accessories manufactured by offshore suppliers. There were several other companies in the field about the same size as RUN and there was very little to distinguish one firm's rebuilt starter (for example) from another. RUN stressed its distribution system and its prompt delivery as its competitive advantage. The company's primary facilities were in Montgomery, Alabama, but 12 warehouses had been established at strategic locations throughout the Southeast. RUN's management team included the Chairman (and founder) Harry White; the Chief Executive Officer, John Harvey; the Sales VP, Joanne Jones; the Operations VP, Tex Armor; and the Secretary/Treasurer (and Harry's Wife), Mary White. All of those people were members of the Board of Directors, together with a partner in the company's law firm, and a vice-president from the company's bank. Both of those men were long time friends of the Whites, and had been associated with the company since its earliest days. The management team was a close-knit group and met frequently for working lunches. Because of the strength of that working relationship, and the strength of the White's personalities, the Board was not significant to theAICPA Case Development Program Case No. 93-11: RUN, Inc. ♦ 3 structure of the firm. Board meetings tended to be formalities, where the results of the previous period and plans for the next period were reviewed and approved. The