Contract and United Airlines

Cardillo Travel Systems, Inc. ACT 1 Russell smith knew why he had been summoned to the mapping of A. Walter Rognlien, the 74-year-old professorship of the board and chief executive officer (CEO) of Smiths employer, Cardillo Travel Systems, Inc. Just two daytimes earlier, Cardillos in-house attorney, Raymond Riley, had requested that Smith, the troupes controller, sign an execration regarding the nature of a transaction Rognlien had negotiated with the unite Airlines.The affidavit stated that the transaction involves $203,000 remuneration by unify Airlines to Cardillo only when failed to disclose why the payment was cosmos made or for what particular purpose the funds would be used. The affidavit included a disceptation indicating that Cardillos stockholders lawfulness exceeded $3 billion, a statement that Smith knew to be incorrect. Smith likewise knew that Cardillo was involved in a lawsuit and that flirt injunction issued in the case required the confederacy to mai ntain stockholders equity of at least $3 million.Because of the blatant misrepresentation in the affidavit concerning Cardillos stockholders equity and a sense of uneasiness regarding United Airlines payment to Cardillo, Smith had refused to sign the affidavit. When Smith stepped into Rognliens office on that day in May 1985, he found non only Rognlien exclusively also Riley and two other Cardillo executives. One of the other executives was Esther Lawrence, the firms energetic 44-year-old persistent and chief operating officer (COO) and Rognliens married woman and confidante. Lawrence, a long-time employee, had assumed control of Cardillos day-to-day operations in 1948.Rognliens two sons by a previous marriage had go away the caller in the early 1980s following a post struggle with Lawrence and their father. As Smith sat waiting for the meeting to begin, his snatch mounted. Although Cardillo had a long and proud history, in recent years the comp each had begun experiencing ser ious financial problems. Founded in 1935 and purchased in 1956 by Rognlien, Cardillo ranked as the fourth-largest company in the travel agency industry and was the first to be listed on a national stock exchange. Cardillos annual taxs had steady increased by and by Rognlien acquired the company, approaching $100 million by 1984.Unfortunately, the companys operating expenses had increased more rapidly. Between 1982 and 1984, Cardillo posted collective losses of nearly $1. 5 million. These poor operating results were largely receivable to an aggressive franchising strategy implemented by Rognlien. In 1984 alone that strategy more than doubled the number of travel agency franchises operated by Cardillo. shortly after the meeting began, the overbearing and volatile Rognlien demanded that Smith sign the affidavit. When Smith steadfastly refused, Rognlien showed him the first page of an unsigned correspondence between United Airlines and Cardillo.Rognlien then explained that the $ 203,000 payment was intended to cover expenses incurred by Cardillo in changing from American Airlines Apollo system. Although the payment was intended to reimburse Cardillo for those expenses and was refundable to United Airlines if non spent, Rognlien precious Smith to record the payment immediately as revenue. Not surprisingly, Rogliens suggested treatment of the United Airlines payment would allow Cardillo to meet the $3 million minimum stockholders equity threshold established by the court monastic order outstanding against the company.Without hesitation, Smith certified Rognlien that recognizing the United Airlines payment as revenue would be improper. At that point, Rognlien told Smith that he was incompetent and unprofessional because he refused to book the united payment as income. Rognlien further told Smith that Cardillo did not need a controller like Smith who would not do what was expected of him. ACT 2 In November 1985, Helen sheepherder, the audit partner supervis ion the 1985 audit of Cardillo by Touche Ross, stumbled across information in the clients files regarding the engagement Rognlien had negotiated with United Airlines earlier that year.When Shepherd asked her subordinates about this agreement, one of them told her of a $ 203,000 adjusting entry Cardillo had recorded in late June. That entry, which follows, had been approved by Lawrence and was seemingly linked to the United Airlines-Cardillo transaction Dr ReceivablesUnited Airlines$203,210 Cr Travel Commissions and Fees203,210 Shepherds subordinates had discovered the adjusting entry during their second-quarter review of Cardillos form 10-Q statement. When asked, Lawrence explanation without attempting to abide it with other audit evidence.After discussing the adjusting entry with her subordinates, Shepherd questioned Lawrence. Lawrence insisted that the adjusting entry had been properly recorded. Shepherd than requested that Lawrence asks United Airlines to provide Touch Ross wi th a stoppage corroboratory the key stipulations of the agreement with Cardillo. Shepherds concern regarding the adjusting entry originate in from information she had reviewed in the clients files that the United Airlines payment to Cardillo was refundable beneath certain(a) conditions and so not recognizable immediately as revenue.Shortly after the meeting between Shepherd and Lawrence, Walter Rognlien contacted the audit partner. Like Lawrence, Rognlien maintained that the $203,000 derive had been properly recorded as commission revenue during the second quarter. Rognlien also told Shepherd that the disputed amount, which United Airlines paid to Cardillo during the third quarter of 1985, was not refundable to United Airlines under any circumstances. After some prodding by Shepherd, Rognlien agreed to allow her to request a confirmation from United Airlines concerning certain features of the agreement.Shepherd received the requested confirmation from United Airlines on Decem ber 17, 1986. The confirmation stated that the disputed amount was refundable through 1990 if certain stipulations of the contractual agreement between the two parties were not fulfilled. After receiving the confirmation, Shepherd called Rognlien and asked him to explain the diaphanous difference of opinion between United Airlines and Cardillo regarding the terms of their agreement with the chairman of the board of United Airlines. Rognlien claimed that pursuant to this confidential business arrangement, the $203,210 would never put on to repaid the United.Shepherds discourse with Rognlien refused. In fact, as Rognlien knew, no such agreement existed. A few days following Shepherds conversation with Rognlien, she advised William Kaye, Cardillos vice president of finance, that the $203,000 amount could not be recognized as revenue until the contractual agreement with United Airlines discontinue in 1990. Kaye refused to make the appropriate adjusting entry, explaining that Lawren ce had insisted that the payment from United Airlines be assign to a revenue account. On December 30, 1958, Rognlien called Shepherd and told her that he was terminating Cardillos relationship with Touche Ross.In early February 1986, Cardillo filled a form 8-K statement with the Securities and substitution Commission ( sulfur) notifying that agency of the companys change in auditors. instant regulations required Cardillo to disclose in the 8-K statement any disagreements involving business relationship, auditing, or financial motifing issues with its former auditor. The 8-K, signed by Lawrence, indicated that no such disagreements preceded Cardillos decision to dismiss Touche Ross. dry regulations also required Touche Ross to draft a letter commenting on the existence of any disagreements with Cardillo.This letter had to be filed as an abut to the 8-K statement. In touche Rosss exhibit letter, Shepherd discussed that the improper news report treatment given that transaction resulted in misrepresented financial statements for Cardillo for the cardinal months ended June 30, 1985, and the nine months ended September 30, 1985. In late February 1986, Raymond Riley, Cardillos legal counsel, wrote Shepherd and insisted that she had misinterpreted the United Airlines-Cardillo transaction in the Touch Ross exhibit letter filed with the companys 8-K.Riley also informed Shepherd that Cardillo would not pay the $17,500 invoice that Touche Ross had submitted to his company. This invoice was for professional services Touche Ross had rendered prior to being dismissed by Rognlien. ACT 3 On January 21, 1986, Cardillo retained KMG primary(prenominal) Hurdman (KMG) to replace Touche Ross as its independent audit firm. KMG soon addressed the accounting treatment Cardillo had applied to the United Airlines payment. When KMG personnel discussed the payment with Rognlien, he informed them to the alleged unfathomable arrangement with United Airlines that superseded the wri tten contractual agreement.According to Rognlien, the secret arrangement precluded United Airlines from demanding a refund of the $203,000 payment under any circumstances. KMG refused to accept this explanation. Roger Shlonsky, the KMG audit partner responsible for Cardillo engagement, told Rognlien that the payment would have to be recognized as revenue on a pro rata derriere over the five-year period of the written contractual agreement with United Airlines. Cardillo began experiencing stern liquidity problems in early 1986. These problems worsened a few months subsequently when a judge enforce a $685,000 judgment on Cardillo to solve a civil suit filed against the company.Following the judge? s ruling Raymond Riley alerted Rognlien and Lawrence that the unfortunate judgment qualified as a substantial event and thus has to be reported to the unsweet in a Form 8-K filling. In the memorandum he sent to his superiors, Riley discussed the serious implications of not disclosing the settlement to the SEC My primary concern by not releasing such report and information is that the officers and directors of Cardillo may be subject to violation of rule 10b-5 of the SEC rules by weakness to disclose information that may be material to a potential investor. Within 10 days of receiving Rileys memorandum, Rognlien change 100,000 shares of Cardillo stock in the open market. Two weeks later, Lawrence issued a disturb deviation disclosing for the first time the adverse legal settlement or that Cardillo remained feasible only because Rognlien had invested in the company the proceeds from the sale of the 100,000 shares of stock. Additionally, Lawrences press release, Roger Shlonsky met with Rognlien and Lawrence. Shlonsky informed them that the press released grossly understated Cardillos estimated loss for financial 1985. Shortly after that meeting, KMG resigned as Cardillos independent audit firm.EPILOGUE In May 1987, the creditors of Cardillo Travel Systems, In c. forced the company into involuntary bankruptcy proceedings. afterward that same year, the SEC concluded a lengthy investigation of the firm. The SEC found that Rognlien, Lawrence, and Kaye had violated several provisions of the federal securities laws. These violations included reservation false representations to outside auditors, failing to maintain accurate financial records, and failing to file prompt financial reports with the SEC, In addition, the federal agency charged Rognlien with violating the insider trading provisions of the federal securities laws.As a result of these findings, the SEC imposed permanent injunctions on each of the three individuals that prohibit them from engaging in future violations of federal securities laws. The SEC also attempted to recover from Rognlien the $237,000 he received from selling the 100,000 shares of Cardillo stock in April 1986. In January 1989, the two parties unconquerable this matter when Rognlien agreed to pay the Sec $60,00 0