Things just didn't seem to add up. Alan had led due diligence teams for his firm before. He was well aware that the reliability of the financial data provided by the 30-year-old family-owned microfiche company, Imaging Services, was not consistent with generally accepted accounting standards and that some of the firm's practices would have to change if the company were acquired. Although impressed with some of the family members on the payroll, he wasn't yet convinced that they were all contributing as much as they could to the overall operation of the firm. The "handshake agreements" the owners had with several large customers reflected the informal practices of many small companies. The absence of detailed travel expense accounts also was troubling.

Despite these observations, a restatement of the firm's historic profitability to eliminate certain anomalies indicated that the firm clearly had been consistently profitable for the last 5 years. Moreover, the firm's cash flow had shown a strong upward trend during this period. A survey of customers indicated substantial satisfaction with product quality and turnaround time factors that were highly valued by the firm's clientele. Because of these considerations, customers were willing to pay a premium to have their paper records converted to microfilm by Imaging Services.

Alan was puzzled by the relatively small expense entry recorded for disposal of silver nitrate, a highly toxic chemical that is used in the conversion of paper...