In early August 1988, John Isaacson, Chairman of the board of Transitional Employment Enterprises, Inc. (TEE) signed an Assurance of Compliance Agreement with the Attorney General of the Commonwealth of Massachusetts. The agreement referred to a Massachusetts law requiring that public charities receiving more than $100,000 in gross support and revenue during a fiscal year must submit to the Division of Public Charities, Office of the Attorney General, a complete audited financial statement for that year, prepared in accordance with generally accepted accounting principles. According to the agreement:
...TEE submitted to the Division of Public Charities an audited financial statement, examined by an independent certified public accountant.... However, the certified public accountant reported that because of an absence of certain accounting records and because of uncertainties about whether certain past cost allocations will be approved by regulatory agencies and whether TEE will be able to recover from its cumulative deficit position, he is unable to state that the financial statement in question presents fairly the financial position of TEE as of June 30, 1987, in conformity with generally accepted accounting principles applied on a consistent basis.
Under the terms of the agreement, TEE obligated itself:
...to keep financial records sufficient to permit application of adequate audit procedures and, in maintaining such records, employ standard accounting methods so as to produce auditable financial results.
Failure to maintain adequate financial records had created some potential financial problems for TEE. According to the Management Statement accompanying its 1987 financial statements:
After providing supported work employment opportunities to disadvantaged populations for 14 years, TEE, as an organization, has recently suffered severe financial setbacks. These problems stem primarily from inadequate accounting and record keeping resulting in potentially large deficits in prior audited operating years.
BACKGROUND
TEE had been organized as a Massachusetts Corporation in 1974. Since that time, it had developed and operated a variety of supported work programs in Massachusetts and New Hampshire. The goal of each program was to develop employment skills of difficult-to-employ people, selected from target populations such as recipients of Aid to Families with Dependent Children (AFDC), mentally retarded individuals, people over 55, high school students with special needs, and people with histories of mental illness.TEE provided work preparation services for these individuals by placing them on site at a private company or public agency. At the end of approximately six months, unsubsidized employment was sought for the participants.
A substantial proportion of TEE’s funding came from state and federal agencies: the Massachusetts Department of Public Welfare (DPW), the Massachusetts Rehabilitation . . .
Assignment
The Bank of New England (see Notes D and E) has asked you whether they should demand payment on their outstanding loans. In preparing your response, please:
- Identify in 25 words or fewer the two (2) most significant accounting issues that you think TEE must concern itself with, and explain in 500 words or fewer why each is significant.
- Identify in 25 words or fewer the two (2) most significant financial management issues that you think TEE must concern itself with, and explain in 500 words or fewer why each is significant.
- Tell the Bank what it should do and why.