Case 4-7 M&A Transaction
Yardley, Inc., is a mid-size company in Oklahoma City. It has been struggling the past few years
because chemical products it uses in its agricultural production process increasingly have been
deemed environmentally unsafe. Yardley’s primary reliance on the agricultural industry for sales
and profits has begun to take its toll. Cash flow is down and the company needs a quick infusion
if it is to survive much longer.
One positive trend for the company is its growing bioscience business. Yardley’s revenues in this
sector have doubled in three years, which may enable the company to return to profitability
within another three years.
Questions
1. What are the ethical issues that should be of concern to Kelly Rogers and Pettit &
Schayes in deciding whether the firm should perform the transaction advisory
services for Mikan?
The key ethical issue here is whether an audit firm that provides audit and tax services for
one client can provide merger and acquisition services for another client that targets the
former client for takeover? The ethical problem is whether objectivity might be impaired
because of the dual arrangement and whether the firm can meet the confidentiality
standard. Can Pettit & Schayes provide M&A services to Mikan at the level expected
without violating the confidences of Yardley, the takeover target? What if the firm knows
about a situation facing Yardley that makes it a questionable takeover target? Will it
(should it) divulge that information?
Under the Independence Rule of AICPA Code, providing (permitted) nonaudit services
for an audit client may create a threat that is not at an acceptable level. If so, the
following safeguards would have to exist to prevent an impairment of Independence. The
attest client and management should agree to the following steps by management.
• Assume all management responsibilities.
• Oversee the service, by designating an individual, preferably within senior
management, who possesses suitable skill, knowledge, and/or experience. The
member should assess and be satisfied that such individual understands the services to
If the attest client is unable or unwilling to assume these responsibilities (for example,
the attest client cannot oversee the nonattest services provided or is unwilling to carry
out such responsibilities due to lack of time or desire), the CPA’s performance of
nonattest services would impair independence.
Before performing nonattest services the CPA should establish and document in
writing her understanding with the attest client (board of directors, audit committee,
or management, as appropriate in the circumstances) regarding:
(1) objectives of the engagement; (2) services to be performed; (3) attest client’s
Ethical Obligations and Decision Making in Accounting, 4/e 3
2. Do you believe one party or the other in the proposed transaction would have an
advantage if Pettit & Schayes is hired to perform the due diligence and advise both
clients on the arrangement?
It is hard to say which party would have an advantage. If the firm knows of information
that might reflect negatively on Yardley and its future prospects then it would have the
classic ethical dilemma of trying to serve two master simultaneously. The best advice is
3. Would your concerns be any different if Mikan were not the auditor of Yardley but
instead a different firm audited its financial statements? Explain.
Yes it would as explained above. Pettit & Schayes should decide which company to