Lavelle Nursing Home: Family Run and Owned*

Alexander Buchholz,

doi:10.5171/2014.338813

Abstract

While concluding the 2012 audit for Lavelle Nursing Home (“Lavelle”), the audit engagement team became aware of a recently signed severance agreement with one of the former shareholders, who was also one of the five cousins who established the business. The agreement provided for the possibility of payments ranging from $0 - $500,000 for a period of ten years. Based on additional auditing procedures performed by the engagement team, it was discovered that the controller had not established any provision on the general ledger for this agreement. The controller also indicated that she was not going to record any provision. The audit engagement team brainstormed as to various alternatives to be taken and also needed to consult with the quality control department.

Highlights

Lavelle Nursing Home was established in 1980 as a two hundred and fifty bed skilled nursing facility
Lavelle’s management explicitly indicated it did not wish to record this liability, since Lavelle has the right to reduce this $500,000 yearly payment if the net income is not substantial enough to warrant incurring an additional expense. While it would be easiest on the audit engagement team to have this agreement voided, Lavelle does not seem to view this as an option
At the conclusion of the case, the four cousins were able to somehow persuade the fifth cousin to void his agreement. The recession of this agreement was sent to the audit engagement team who submitted it to the quality control partner

Summary

Introduction

Lavelle Nursing Home was established in 1980 as a two hundred and fifty bed skilled nursing facility. Lavelle’s management explicitly indicated it did not wish to record this liability, since Lavelle has the right to reduce this $500,000 yearly payment if the net income is not substantial enough to warrant incurring an additional expense While it would be easiest on the audit engagement team to have this agreement voided, Lavelle does not seem to view this as an option. The audit engagement partner might be able to suggest to the controller that, while an accrual need not be made at this time, a footnote should appear in the notes to the financials This transaction should be footnoted as to the agreement made and the possible range of outcomes, which in this case ranges from $0 - $500,000 for the ten years along with the fact that this is a related party transaction.

This would be considered a Deferred

Conclusion