This case provides senior-level accounting majors and graduate students a perspective and an appreciation of topics in areas of corporate governance, The Sarbanes Oxley Act (SOX) and board of directors/audit committee protocol. Utilizing role playing, this case has a heavy emphasis on the business communication process, written and verbal, necessary to effectively and efficiently describe business issues relating to corporate governance and recommend appropriate actions. The key accounting issue discussed in the case is revenue recognition. This is an area of constant concern to audit committees, management and auditors, especially for public companies.
This case meets the increased need to provide instruction in this new and critical area of corporate governance. The teaching notes provide a roadmap (suggestions on exercises, role playing and communication processes) for instructors who are interested in teaching corporate governance at the undergraduate or graduate level.
Key Words: Corporate Governance, SOX, Sarbanes Oxley Act, Audit Committee, Board of Directors, Revenue Recognition, Software Development
BACKGROUND - FEBRUARY 15, 2008
Jones Company is a public company in the financial software development business located in Minneapolis. Market capitalization has fluctuated between $350 million and $375 million over the last twelve months. There are 15,000,000 shares outstanding as of December 31, 2007. Sales have grown from approximately $100 million in the year ending December 31, 2004 to the current forecast sales of $150 million for the year ending December 31, 2008. The primary product is a software suite that includes the components of General Ledger (GL), Accounts Payable (AP), Financial Reporting (FP) and Work Management (WM). The company rarely sells the components individually, but they would work quite easily within other systems such as Oracle, SAP or JD Edwards. The company has a reputation of delivering a quality product on time that works. In fact, that has become the company's byline in various types of advertising. Net income for the last four years and forecast for 2008 is as follows:
The company has the typical type of corporate organization with the exception that the chairman of the board is independent and not a company employee. The corporate governance process and overall Sarbanes-Oxley (SOX) review have gone well for 2004-2007 with management asserting that proper internal controls are in place and the auditors attesting to management's assertion. The relationship with the audit team has gone well, with the same audit team in place from 1999 when the company went public, to 2006. The company board consists of four independent directors with diverse backgrounds including financial systems, accounting and sales. All of the directors are senior officers from Twin Cities companies. The audit committee financial expert is a CFO from one of the local companies and a CPA.
Jones management is very pleased with the software sales for the current fiscal year, ending December 31, 2007 and forecast sales for 2008. The company, due to its strong growth, has needed additional financing from its banks and plans on an additional stock issuance within the next six months. The loans, taken out at the beginning of 2006, must be renewed at the end of each year and have covenants that require a 15 % growth in net income from fiscal year to fiscal year as long as the debt is in place. Management was concerned about meeting these requirements, but with strong sales and new orders in hand, the company is confident that loan covenants will be met easily. In addition, management has had several meetings with underwriters to plan a stock offering and plans are going forward on that financial front. However, as a precaution, the underwriters have reminded the company, that as a relatively small company in a highly competitive industry, a solid strategy and strong revenue and earnings growth are a must to sell equity in this market and that there can be no problems with financial reporting for the current year. …