Pinnacle, Inc.,* a publicly traded Fortune 500 manufacturer of electronic parts headquartered in Baltimore, managed several operations around the country, including Summit, Inc.,* of Chicago.
The once-profitable Summit already faced financial clouds when president Sam Willis* and controller Mark Williams* joined the company. Challenges included a coming transition to digital products and delays in implementing new production costing software.
Despite optimistic budget projections, profits began to fall in year two, generating meetings and demanding phone calls from Pinnacle CEO Ted Mantle*. In a further confrontation on August 20, Mark reported he was doing everything possible to enhance third-quarter earnings, but adjusting the numbers further would be "cooking the books." Before the call ended, Ted again insisted Mark "make the numbers" as originally budgeted.
Matters worsened by year end. With no way to accurately value ending inventory, Sam and Mark adjusted the cost of sales to match the budget. Ten months later, the new cost accounting system was finally functioning, and the true picture of understated costs emerged. Shortly after contacting Pinnacle’s external auditor about the discrepancy, Sam and Mark were terminated, and slapped with a civil lawsuit for financial statement fraud by Pinnacle.
Ted and other Pinnacle executives denied the frequent conferences had occurred, along with any unreasonable demands to produce budget-level financial performance. In response, the defendants’ attorneys retained Dennis M. Taylor, of Taylor Rees Beckey, as an expert witness in forensic accounting. In helping the attorneys make their case, Mr. Taylor reviewed several years of financial documents, internal and external communications, audit notes and detailed transaction records for the years before, during and after the alleged fraud. His work revealed a clear pattern.
Taylor determined that Pinnacle mandated questionable entries in past financial statements, and Summit’s cost accounting records and financial reporting system were both inadequate and insufficient. At trial, he testified the defendants had no better alternative than to rely on the budget’s gross profit percentage when valuing inventory.
The judge agreed, ruling the defendants had acted reasonably. The adept forensic accounting skills and resources of Taylor Rees Beckey revealed the facts of a real “fish story”– and helped the attorneys convince the court their clients were not guilty.
* For confidentiality, case names have been changed.
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