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An Offer You Can’t Refuse

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Case 10-10: An offer You Can’t Refuse I. Overview of case facts: * Fast Eddie is a government contractor of refrigeration systems. * It is being investigated by a governmental for overpricing on sales from 2003 to 2005 and allegations of misrepresentation by its former officer, Sweet Lou. * The criminal and civil investigation began in late 2005. * The government obtains a subpoena for all of Fast Eddie’s corporate record related to the case. * The company’s auditor issued a standard unqualified opinion on Fast Eddie’s 2006 Financial Statements with no liability accrued. * In 2006, the company immediately began an internal investigation. * Fast Eddie dismissed Sweet Lou because of his allegations of defective pricing. * As of March 31, 2007, the government had not filed any charges or specified a monetary penalty against Fast Eddie. * In April 2007, Fast Eddie documented an offer to settle the government’s investigation for $3.7 million (100% of the pretax profits + penalties). * The settlement offer is the best choice for both the company and the government: 1. Even though the sales forms had been completed incorrectly, the government was not overcharged for any equipment or services. 2. The government would probably not win any money if goes to trial. 3. FE’s defense includes the company’s inability to provide accurate pricing data because of the confusing nature of the forms and the technical requirements related to the standard contract price reductions clause. 4. The government has not been harmed by this event because FE always provides quality products at competitive prices. II. Problems: 1. Is Fast Eddie required to accrue a liability as of March 31, 2007, financial statements related to the ongoing government investigation? If so, how much?

2. If Fast Eddie withdraws the

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