Blowing the Whistle on Former Partners
On St. Patrick's Day in 1992, Chambers Development Company, one of the largest landfill and waste management firms in the United States, announced that it had been engaging in improper accounting for years. Wall Street fear over what this announcement implied about the company's track record of steady earnings growth sent Chambers' stock price plunging by 62% in one day.
The improper accounting by Chambers had been discovered in the course of the external audit. The auditors found that $362 million in expenses had not been reported since Chambers first became a public company in 1985. If this amount of additional expense had been reported, it would have completely wiped out all the profit reported by Chambers since it first went public. The difficult part of this situation was that a large number of the financial staff working for Chambers were former partners in the audit firm performing the audit. These accountants had first worked as independent external auditors at Chambers, then were hired by Chambers, and subsequently were audited by their old partners.
What ethical and economic issues did the auditors of Chambers Development Company face as they considered whether to blow the whistle on their former partners?