Acc1

When Change isn’t so good: A story of new management and misleading statements INTRODUCTION

A single tear rolled down her cheek as she thought about the last 20 years. Liz had devoted most of her career to this company. She loved BFR, Inc., the customers, the employees, even the cleaning crew that came in after hours. Liz was always the shining star in the office. Everyone’s biggest fan and strongest supporter. She was dedicated to her work and the firm. It was her life’s mission. If someone had a question, Liz was the one to go to. They trusted her to get the job done, be fair, and above all, to protect the firm. Now Liz has hit a fork in the road and is not quite sure how to move forward. Liz found herself wondering how she got here and what options she had. She couldn’t imagine life without BFR. Liz was wondering if she could she make it without this role. Afterall, it is all she has known for two decades. On the other hand, Liz knows her integrity is everything. She should not let the company define her career and she is trusted to make tough choices. This dilemma is breaking her heart. Liz is contemplating leaving BFR, but she does not want to leave her dedicated employees. She is not one to jump ship when it is sinking. Instead, Liz would rather repair the ship and keep it steering in the right direction. However, she feels that is impossible. Several people had tried and were terminated. If Liz stands up for what she thinks is right, she could lose her job. If she loses her job, she would also lose her health insurance. Liz just finished a battle with cancer and was finally declared cancer-free three months ago. If she loses her job and she has a relapse, she may not be able to afford to fight cancer again. COMPANY BACKGROUND Break Free Renewal, Inc. (BFR), was formed in 1995 as an addiction support charity. The company is a 501(c)(3) organization located in Charleston, West Virginia, United States. BFR provides support for addiction recovery including inpatient and outpatient support, housing, and family support services. The main sources of revenue for BFR are individual and corporate donations, grants, and the sales of some products and services. The company developed an addiction support training certification program that they charge participants to complete. Participants, referred to as students, in the program must pay for each course of the program. BFR also offers continuing professional education courses. The company also partners with a local college to teach some of the courses in their psychology and nursing programs. As of 2023, BFR has 38 full-time administrative employees, 87 full-time counselors, and another 75 part-time employees. The company had a five-year history of growing revenues and a large unrestricted cash balance that had accumulated to 36 million USD before the COVID-19 pandemic hit. The company had saved the cash for future growth and for potential economic downturns. However, the company began upgrading and expanding facilities, hiring additional employees, expanding programs, revamping marketing, and trying to better invest the cash reserves in 2018. Now the company is facing the impact of the economic downturn from the pandemic and does not have the large cash reserves to help mitigate the impact.

MANAGEMENT BACKGROUND The company was managed by James Sims from 1995-2018. James was with the company from the beginning and worked his way up to the position of executive director, where he remained for 15 years. He led the company with a laissez faire leadership style and was very friendly, energetic, and transparent. James felt BFR was his legacy. He thought of the employees as family. James walked through the office halls every morning to say hello to the employees. He held quarterly meetings with the employees to discuss the current state of BFR, future projections, and to brainstorm ideas and discuss any issues. James was conservative with an accounting background. He believed in saving money as he had been through some tough times with the company and knew the value of having a savings. James was always very transparent about plans and finances to the board of directors, donors, etc. James retired at the beginning of 2018 after losing his grandson to cancer. He felt life was too short and decided to retire and spend more time with his family. In March 2018, the new executive director, Sam Phillips, came on board. Sam came from the private sector with some management background, but limited finance and accounting experience. When Sam came into the company, he restructured the company and brought in two of his previous employees, Steven Trombly and Alexis Anderson, as the newly created positions of chief information officer (CIO) and chief financial officer (CFO), respectively. The executive director position title was changed to chief executive officer (CEO). The organizational structure was further changed to combine the administrative and finance functions under the CFO. See figures 1 and 2. Sam’s leadership style is very different from the previous executive director. He leads with more of an authoritative style. He is the primary decision maker, only communicates directly with the CIO, CFO, Development Director, Marketing Director, and Programs Director. The quarterly meetings with all employees were stopped. Sam is not in the office much as he is also helping to run a family business. The culture at BFR has shifted from the positive, comfortable, friendly, family-like atmosphere to a more reserved, disconnected atmosphere. Many employees have left because of clashes with the new CEO. Some by their own will and some were fired. The employees who left no longer kept in contact with the others still at the firm, even though they had been like a family for years. In fact, when current employees saw them out in public, they made it seem like they were no longer allowed to talk to them. Rumors of non-disclosure agreements circled, and people were scared. NEW MANAGEMENT, CHANGES, UNCOMFORTABLE ADJUSTMENT Liz Kane is the budget director for BFR. Her job is to create and manage the company’s budget including projections, monthly review and compliance reports. Liz works with other departments and considers market and economic trends to determine the revenue and expense projections. She compiles and reviews the monthly reports and addresses any issues. Liz has held this position for 20 years. When the new executive director/CEO came in, she was skeptical, but her optimistic personality and extreme dedication made Liz fiercely defend Sam and try her best to be supportive. She reinforced her support to her employees. Liz let them

know that new management and leadership styles can be difficult to adjust to, but that they all shared the same goals, would find middle ground, and learn to work well together. Liz knew BFR needed a united front and employees must support management, or it could destroy the company and everything they had worked so hard to create. However, it was becoming more difficult each day. Things have changed gradually over the past three and a half years. Liz and the other directors previously attended all board meetings and presented information from their departments. However, now they are not allowed in the board meetings at all. At first Liz thought maybe they forgot to invite the other directors to the board meetings, so she went to the first one after Sam was in charge. After the meeting Sam informed her that she was no longer needed at the board meetings. Only the CEO, CIO, and CFO were to attend the board meetings going forward. Liz was a bit taken back by that change and wondered if she had done something to offend Sam. She enjoyed seeing the board of directors and always answered questions about the budget and the projections. Liz was frustrated and disappointed, but she knew that new management meant new perspectives, new visions, and new goals. She knew she needed to be supportive and work hard toward the new goals. Liz would support Sam even if their personalities clashed and their perspectives were very different. She knew from discussions with her executive coach that sometimes she could be resistant to change. So, Liz made it her personal mission to work hard towards acceptance of the new management and changes. Liz prepared reports for the board of directors for each quarterly meeting. However, over the past three and a half years, many of her reports had been altered gradually to where now, they were completely different. Liz felt they no longer represented what they were supposed to and in fact, she feared they were misleading to the board members. Before the new CEO, Liz had prepared board materials with the operating budget to date, comparison to actual, and a detailed analysis of the cash balance. See tables 1 and 2. The detailed analysis of the cash balance report was removed. In its place, the board members were given a total cash balance at the bottom of the statements that included restricted and unrestricted cash combined. The board members would not know how much of the cash was unrestricted and available for use. Eventually, Liz was asked to alter her reports and projections beginning in 2020.

ALTERED REPORT It was Tuesday afternoon before Friday’s March 2020 board of directors’ meeting. Alexis, the CFO, emailed Liz new projections they wanted to use for her report. The projections were materially different than hers. In fact, the new projections showed revenues that were 2.2 million USD higher than Liz’s. Liz inquired about the projections. She asked Alexis to see the supporting documentation that the projections were based on so she could make the changes. Alexis said she did not have any documentation. She told Liz that Sam sent the projections to them, and requested Liz to make the changes. Liz told Alexis that she did not feel comfortable changing her numbers without sufficient support and rationale. She explained the projections were lower than originally expected due to a downturn in economic conditions and the COVID- 19 pandemic. Revenues were lower and expenses were increasing. There was a lot of uncertainty due to the pandemic. Liz explained her position as a certified management accountant (CMA) and her duty to maintain the credibility of her reports. Alexis said she understood and asked Liz to send the reports without the changes for the board meeting. See

tables 3 and 4. Liz was perplexed by the request to change the projections and was hopeful that the rationale and support would be sent to her soon. Monday morning after the board of director’s meeting, Liz went online and downloaded the board meeting materials to review. This was standard procedure for her, as Liz always downloaded, saved the materials, and added her notes with her reports. When Liz reviewed the report, she was shocked. Her numbers had been changed. See table 5. The projected revenues were 2.2 million USD higher than her original report and the expenses. Liz was upset. She immediately contacted Alexis. Alexis was very stern and instructed Liz to report what she was told to report. She then told Liz that the CEO was not required to share with her his rationale, nor his supporting documentation. They had a heated discussion, Liz explained her responsibilities under the Institute of Management Accountants (IMA) Statement of Ethical Professional Practice and told Alexis that she was not trying to be difficult, but she was scared she would lose her license if she made changes without any understanding of the basis. At the end of the conversation, Alexis said she understood and agreed that if they changed her numbers again, they would put the caveat at the bottom that the numbers were prepared by management. This was supposed to imply that Liz, the budget director, did not prepare them. Liz still thought that was a bit confusing, because technically she is management. However, she chose not to continue the argument. GROWING DISSENT Liz has continued to be dissatisfied and worried about the credibility of financial information distributed to the board of directors. It is now 2023 and Liz is even more worried. The most recent report to the board of directors was altered to show projected revenues 3.2 million USD higher and projected expenses 1.5 million USD lower than her original report. See tables 6, 7, and 8. Alexis continued to withhold explanations and supporting documentation for the changes. Liz had given up hope that she would ever understand the rationale for the changes. She was concerned about the survival of the company. The spending in the past few years had reduced the unrestricted cash to only 1.5 million USD. Sam had approved a major refresh of all the buildings, built two new housing developments, built a new executive suite, and hired a major marketing firm. While these were all good improvements, the pandemic had caused major increases to expenses and the revenues were declining. They were unable to fill the rooms in the new housing developments due to the market. The budget outlook was grim and Liz’s budget for 2023 showed that the expenses this year would exceed revenues by over 3 million USD. In the past, BFR could have covered this budget deficit with the unrestricted cash saved. However, now they did not have enough saved to cover the shortfall. Liz was worried about the cash flow issues. She voiced her concerns to Alexis who told her not to worry that they had it under control. In fact, the report that was distributed to the board of directors showed revenues exceeding expenses by over 1 million USD. However, they did not offer any further explanation, nor the basis for those changes. Liz wondered why the board of directors was not asking more questions. She wondered if they had enough information to know that there were issues. The board of directors were only given the CEO revised budget, no comparative year information, and no cash balance details. The total cash figures given included unrestricted and restricted cash. The restricted cash could not be used for operating expenses. However, the board would not know the breakout and

may assume that the cash is all unrestricted. They also did not have comparative information to see the fluctuations. Therefore, unless the board members were pulling prior year reports themselves, then they may not know there is an issue. This was very disheartening to Liz. TURNING POINT Jim Galagher, a board member, stopped by Liz’s office this morning with his most recent board meeting materials. He had a question about the budget and wanted to know how the performance was when the market had been hit hard by the pandemic. He also wanted to know why they were not given the budget to actual figures and the breakout of cash balances anymore. Jim was concerned about the caveat at the bottom of the report disclosing the report was created by management. He did not remember that being there in the past and wanted clarification. He asked Liz, “wasn’t the report always prepared by management?” Jim explained he had not been able to dedicate a lot of time for review of the information the past couple of years due to the struggle of the pandemic on his own company. However, he was there now, at Liz’s desk, and demanded explanations. Liz explained to Jim that she had an appointment in just a few minutes. She asked if they could discuss it another time. Jim told her he would be back tomorrow morning at 10:00. Now Liz is panicking. She is fearful that the reports were altered due to the failure to meet projections and that the budget to actual comparison and cash details were removed so the board could not make the connection. However, she had no proof. Sam and Alexis could know something she does not. Sam is running the company and surely, he is coming up with a solution. Liz is scared to voice her concerns to Jim because if she is wrong, she could risk her job. She also is not sure if the changes are considered fraud or even illegal because they are internal reports going to the board of directors, not published financial statements. However, if Sam does not have something else in the works and Liz does not voice her concern, the company could be at risk of failing. If BFR runs out of cash, they will not be able to pay for expenses, and no one would have a job, nor would BFR be able to continue its mission. Liz is reviewing the IMA Statement of Ethical Professional Practice and has called you on the IMA Ethical Helpline number for advice. She asks you for your advice on what to do. Advise Liz of her options, discuss whether the changes to the reports and decrease in transparency are considered fraud, illegal, and/or are in violation of the IMA Statement of Ethical Professional Practice.

Questions to address:

1. Reviewing the IMA Statement of Ethical Professional Practice, which of the IMA’s overarching ethical principles are potentially compromised by Liz’s position?

2. Is management perpetrating fraud? Is what they are doing illegal? Unethical? Explain.

3. How does the misleading information impact decision-making? 4. What damages could potentially be caused with the misleading information? 5. If you were a board member and found out about the changes and discrepancies in

the material presented, how would you feel? 6. Identify the stakeholders in this case. Then discuss how Liz’s decision may impact the

stakeholders. 7. What do you recommend Liz do? Be sure to defend your answer.

Figure 1. Organizational Chart January 1, 2018

Figure 2. Organizational Chart March 31, 2018

Table 1. Cash Balance Analysis Report as of February 28, 2018

Table 2. Fiscal Year 2018 Budget as of February 28, 2018

Table 3. Cash Balance Analysis Report as of February 29, 2020 – Original as Prepared by Liz

Table 4. Fiscal Year 2020 Budget as of February 29, 2020 – Original as Prepared by Liz

Table 5. Fiscal Year 2020 Budget as of February 29, 2020 – Report Provided to Board of Directors

Table 6. Cash Balance Analysis Report as of February 28, 2023 – Original as Prepared by Liz

Table 7. Fiscal Year 2023 Budget as of February 28, 2023 – Original as Prepared by Liz

Table 8. Fiscal Year 2023 Budget as of February 29, 2023 – Report Provided to Board of Directors