by Reed Sprague
“Stuart Gualt here. What can I do for you?”
“Hold on a moment, Mr. Gualt, Mr. Peterson would like to speak with you. Hold on the line for a moment and I’ll put him on,” Peterson’s secretary pronounced to Gualt after he answered the phone.
“Hi Stew, it’s Tyler Peterson. How are you?”
“Tyler Peterson? Mr. Peterson? It’s so good to hear your voice. How have you been, sir? I’ve been working with your people for quite awhile now. It’s great to hear from you personally. I’m a long–time listener to your radio show. You probably don’t remember, but we’ve talked several times.”
“I’m well, and I know you are. I’ve heard good things. Hope you’re prospering.”
“Yes. The Lord is good. He’s good, and He’s been good to me.”
“Great. Listen, we need to get this office park deal closed. Andy said for me to call you, that you’re the man who can make it happen, Stew.”
“Sure, Mr. Peterson. Let me know what you want me to do and I’ll do it, unless it involves giving up my wife or firstborn!” Gualt said, attempting a joke. Peterson didn’t laugh so Gualt didn’t laugh either.
“I understand that you don’t need that office park any longer. I just want to close the deal. You can’t imagine what it would mean to us to have that park. We could quickly work out a purchase arrangement with you that would work for you and for us. There are tax breaks available for you, and we can take advantage of outright rebates for reconstruction in one of the federal government’s renovation zones, as defined in the new federal inner city reconstruction act. God’s in this, Stew. He’s brought the whole thing together. It’s great to be right in the center of His will. We need to get this thing closed out for Him,” Peterson said.
“We can get Style & Shores to finance it all and do all the paperwork. They’re ready to go. Their lawyers and CPAs will handle all of the government reporting, legal issues, accounting stuff, and so on. You will just sit back, collect the check, enjoy the tax deduction, and get publicity for your corporation for making the deal work. The math for this is astounding. It will work for both of us, and the government will pick up so much of the tab that it’s almost unfair to them. We’ll toast each other many times over with the savings from the government’s payments,” Peterson explained.
“Here’s what they told me at Style & Shores: If your people can work a deal for us where you sell us the building at a discounted price, you get the tax deduction for the difference between the market value of the building and the amount you sell it to us for.
“Admittedly you will not receive the full market value. But if you consider the tax deduction you will receive and the free publicity you will get for the generosity of the deal for us, because we are a registered non–profit corporation, you come out way ahead.
“Then, if you’re willing to finance the deferred building maintenance and needed renovations, by outright contribution to us, you will receive a dollar for dollar tax credit under the new federal inner city reconstruction act.”
“This is brilliant, Mr. Peterson. That office park has been a drain on us for over a decade. And I would be honored to do my part to bring this deal to a close in God’s name. There is no reason that I can think of that we would not take advantage of this. For all the reasons you said and more, neither of us can lose, especially given the fact that those generous boys in Washington have offered to pick up so much of the tab.
“I’ll get things going over at Style & Shores. That way things will start right away. As soon as Style & Shores gets involved and realizes that all they have to do is handle the paperwork and turn on the money tap to us, things will go through quickly. They can’t lose, either! As soon as our tap is opened to them, the government will open its tap to everyone involved,” Gualt said.
“Thanks so much, Stew. Let’s just make sure that the whole thing goes through as a deal that everyone wins on, and let’s get it done soon. God is waiting.”
Style and Shores Bank was the largest bank holding company in the world. Its branch offices were located in nearly every city in America, and it also maintained offices and banks in all major countries. Though its image to the general public was one of a stodgy, old and conservative bank — “proud to be doing business the way your grandparents did” — Style and Shores was not your grandfather’s bank. It was clearly the most aggressive financial services company in the world.
Style & Shores was at the same time a bank, investment broker, financial advisor, mortgage lender, high stakes investor, corporate raider and corporate lender. There was not a finance deal it would shy away from. The inside joke in the financial services industry was that if you had plans to grow coffee beans on the surface of Mars, Style & Shores would lend the money needed to establish the farm there.
Beneath the image and the clean audit reports there was trouble at Style and Shores. Loans were bad. Debt payments were not being received on time. Underlying collateral many times either did not actually exist or was nearly worthless. Investments were booked at unrealistically high values. Still, the balance sheet and income statement shined. Government regulators were content, downright giddy, over the bank’s public financial statements.
The senior audit team was set to meet to go over the draft of the audit report for Style & Shores. Months of audit work by Style & Shores’ independent CPA firm was complete now. All that was needed was to hold one final meeting to iron out small details, then the full audit report and management letter could be issued.
“Okay, ladies and gentlemen, today we talk about the final working draft of the audit report for Style and Shores. It’s due to the bank’s board next week, seven days from right now,” fifty–two–year–old James McCann said. McCann, the senior auditor, was meeting with his independent audit team to discuss the proposed audit management letter and financial audit comments.
McCann’s firm, McCann, Johnson, Brown and Kyleme, had a reputation of being a first rate audit firm. Reputation meant everything in the CPA profession. Theirs was an image that had been created, fine tuned and polished to a blinding sheen by years of nonstop ads, public relations releases, and overt omnipresence at corporate parties held for corporate bigwigs throughout the world. The firm was in. They were hot. Corporations who were fortunate enough to be considered by them were few and far between. McCann knew how to make himself appealing. His firm’s image would shine so bright that the inner workings didn’t matter, even to the skeptic. McCann had learned well from many of the large P.R. firms he audited throughout the years. Polish mattered. Things had better shine.
Style & Shores was not considered to be fortunate to have McCann, though. He was fortunate to have them, and he knew that very well. “Lose Style & Shores and we close down,” he often said to his senior partners. McCann’s father, the founder of the audit firm, taught his son that there was to be no compromise where Style & Shores was concerned. “Take care of Style & Shores,” was Dad’s simple admonishment. The firm’s contract with the bank called for annual audit fees of one hundred seventy–two million dollars—with millions on top of that for fees paid for management consulting services and various other professional services.
“We are going to consider each senior account rep’s opinions, including those of the senior field auditors. Each person around this table needs to speak his or her mind with regard to this account. I remind you of the confidential nature of our discussions. I further remind you that each of you is under contract with this firm to act in our best interest. I will not tolerate discussions of any kind whatsoever with persons outside of this meeting. That includes discussions you might have among yourselves when you are together for other reasons after this meeting.”
Though James McCann had roughly followed the structural and organizational model for CPA firms — several general partners, a few senior partners, and many up–and–coming junior partners — he remained in full and absolute control. His father taught him all he needed to know about the corporate structure
of a CPA firm. He taught him that the firm’s organizational chart that existed on paper was useless. He taught his son that he alone was to have lunch with the firm’s most prestigious clients. He alone was to run all of the most important meetings. He alone was to run the entire firm itself, including the office cleaning crew. Somehow he must approve each person hired and each person fired, his father said.
McCann learned from his father that he must encourage each audit manager, or any other employee, to let him know of any problems encountered during the day–to–day operations. There was no need for any employee to go to his supervisor to work out a problem; McCann was the boss, and he was all anyone needed.
The organizational chart looked impressive on paper. Boxes were staggered carefully all over the pages — middle managers, senior managers, partners at various levels, McCann at the top. In reality, while McCann was at the top, no further staggering of boxes was needed. His box was at the top of the real power structure — the real organizational chart — and all other boxes were lined horizontally underneath his. The whole thing worked well for McCann.
The firm’s partnership agreements, which had to be signed yearly by each partner, called for ouster of McCann after a painfully complex series of steps, culminating in a ninety–five percent vote to ouster by all partners. Other disciplinary action required the same complex process but with an eighty percent vote to discipline. The agreements called for the votes to be cast “secretly,” but with a hitch. Secret ballots were secret to all except McCann. There were categories of partners. Senior partners’ votes counted more heavily than junior partners’ votes.
In a stroke of control genius, the partnership agreements allowed for McCann to fire any partner for “malicious action” taken against the senior managing partner. If all of the requirements were somehow met to bring to a vote the ouster or discipline of McCann, a vote would be taken. A vote to ouster had to be at least ninety–five percent. A vote to discipline had to be at least seventy–five percent. For any such vote that totaled less, the partners’ contracts defined such a situation as “malicious actions” against McCann. This clause allowed for the firing of any partner who voted in that case to take the action against McCann.
“We begin with the senior field auditor on the account. Victoria, go ahead. What’s your general opinion?”
Victoria Knight came to the firm out of high school. She began as a clerk, making simple entries onto the firm’s books for miscellaneous petty cash transactions and office supply expenditures. McCann decided she was auditor material and agreed to invest in her. She attended college and majored in business, earning her undergraduate degree and then her master’s, all paid for by the firm. She passed the Texas state CPA exam on her first attempt. Her career was very successful, just as all who knew her expected. She was grateful to the firm. Her boss was grateful that she was grateful. He liked it when a subordinate owed him. Those situations bred the right opinions and advice he needed to hear.
“I believe that, with a few minor exceptions, Style and Shores is financially sound, and our report should reflect that reality. We need to produce a clean report with minor suggestions for improvement. That’s all that is needed. You’ve already seen my suggestions in the paperwork you were given last week. So, as far as I’m concerned we can move on. That’s really all I have to say,” Knight reported.
“That’s it?” McCann asked, rhetorically, not really wanting an answer, and obviously satisfied that he had been told exactly what he wanted to hear. “We really are in great shape, aren’t we, Victoria. Thank you so much for that fine report. Okay, Jonah, give us your thoughts.”
Jonah Winston had been with the firm for sixteen years. Though he had been at the firm longer than Knight, he had worked under her for the last eight years. “I’m sorry, Mr. McCann, but there are serious problems at Style and Shores, and we can’t issue a clean report. In fact, this bank is on the edge of collapse.” Winston proceeded methodically — very carefully — but without reservation, and somehow completely emboldened. “It’s over. The bank is carrying investment assets at inflated, even bloated, values that far exceed realizable value. Additionally, they have committed misrepresentation and even outright fraud again and again.
“The truth is that they have been doing this for at least five years now. We can’t be a part of that. It’s corporate fraud, plain and simple. If we issue a clean report, millions of investors will do what they’ve done for years; they will invest their money in the bank. This time, though, the house of cards will collapse. My estimation is that it will all fall apart within—”
McCann did not appreciate boldness. Before Winston could finish his sentence, McCann strongly interjected, blasting his words out of his tightened lips and blazing red face, “Who in the hell do you think you are, Jonah! You need to reconsider your position. I’m placing you on unpaid leave at once. You will exit this room and this office, and you will not return until I say that it’s okay for you to return. You are to speak with no one about this—no one at all. I’ll sue you for all you have. I’ll ruin you. I’ll ruin you completely! You will not say anything like that, ever again! Do you hear me?
“Each of you will strike his statements from your memory. This discourse never happened. Do you hear me? It never happened. This meeting is adjourned. Ms. Knight, I need to see you for a few minutes. You will stay here and meet with me privately for a few minutes.”
“Mr. McCann, I don’t know what got into him,” Knight said, as she attempted her explanation, even before the others had cleared the room. “We were in agreement. He understands the issues. This was to be a clean audit, a clean report through and through.”
Still indignant, and hardly cooled down at all, McCann continued, “I’ve heard enough. I have no intention of ending my working career broke and with no reputation. I’ve worked hard, and Style and Shores has been good to me. They built this firm. Do you understand that, Knight? They built this firm. If we lose them, especially if they go down the drain, the other partners here will oust me. I’ll be sued for all I have. My wife and children will inherit nothing. Millions of Style & Shores investors, employees and customers from all over the world will turn into buzzards and pick away at whatever flesh I’m left with. This is not going to happen,” McCann stammered as he awkwardly slammed his hand on his desk. “This can’t happen!”
“What do you want me to do, Mr. McCann?”
McCann blasted out at her, “I’ll tell you what you’re going to do, Victoria, you’re going to appeal to this guy. Let him know that he has a family to support and a reputation. Let him know that, while his compensation package is worth nearly two hundred seventy–five thousand dollars each year, we can just as easily make sure that he’ll work the remainder of his life flipping hamburgers for eight dollars an hour, and that’s only if he can get a ride to the burger joint each day from his hut in the ghetto where he’ll end up!
“Make sure he knows that he is on record as supporting Style & Shores’ last seven years’ clean audit reports. Make sure that he knows that if he continues his righteous crusade, he will go down with all others who go down. Make sure he knows that, and make sure that you convince him of all of that by the end of the day today. I want to see you and him in my office exactly twenty–four hours from now, and he had better have the right opinion at that time.”
McCann took an hour to cool off and then reconvened the meeting with all others except Winston. “I expect that we can have professional consultation and discussion now about the audit report and management letter for Style and Shores Bank Holding Company,” McCann said calmly and businesslike. “Let’s see, Robert, you are our newest senior auditor, though you’ve been with us for only two years now. By the way, congratulations on being the first person in this firm’s fifty year history to make it to the position of senior auditor after just two years. That was not an easy accomplishment. I commend you for your excellent work. What are your thoughts with regard to the bank?”
“Thank you, Mr. McCann. Your support during the past two years has meant more to me than I can say. You have guided me and led me as only a true leader can. I greatly appreciate your leadership.”
Robert Frankel was formal, stern, punctual and masculine, but not overbearing. He dressed to a T, but never overly so. Just right. Frankel said the right things each time he spoke and, as a result, his words commanded attention. People listened to him.
“The bank is fine. Its investment assets are valued realistically because they are valued according to the audit rules governing such valuations. That makes the values realistic. And their loans seem to be in good shape. The place is in good shape. For example, audit rule S.555.47(b)(8)(iv) states clearly that a bank’s assets can be valued at the higher of market or realizable, whichever is most realistic. It’s subjective.
“The bank is allowed to make the call and we’re allowed to make the call. The audit rule does not say that anyone, either the client or us, is required to make the right call. Actual value can deviate from the booked value as determined by the client and/or the auditor. For example, if there are reasonable grounds to value a stock holding at, say, one hundred million dollars, and the bank chooses to do that, they have simply stated their opinion. The asset could be worth anywhere from five dollars to five hundred million dollars. It’s really up to the person who reads the balance sheet to determine the type of investment asset in question, do his homework, and determine if the asset has as its actual value the amount carried on the balance sheet.
“In the case of Style and Shores, we agree with their valuations. Such initial valuation or agreement of such valuation does not mean that either the bank or our firm is precise. Precision is not required.
“For God’s sake, guys, we’re okay with this. This is fine. Let’s get going with the report. We’ve all done a good job here.”