CASE 1.6 Star Technologies, Inc. Economic ups and downs are a fact of life for companies in high-tech industries. Take the case of Star Technologies, Inc., a Virginia-based computer manufacturer incorporated in 1981 that went public in 1984." In its early years, Star marketed scien- tific computers or “supercomputers” for highly specialized uses, including military surveillance and petroleum exploration. Star's operating results gyrated wildly during the 1980s, Exhibit 1 presents Stars key financial data for the fiveyear period i 1985-1989, Notice that in 1985 Star reported a net loss exceeding $8 million on rev- , enues of $21.2 million. The following year’s results were even worse. In 1987, Star's i revenues vaulted to $44 million, allowing the company to earn an aftertax profit of $1.4 million. Two years later, more bad news. Stars revenues fell to $39 million in 1989, resulting in a loss of $4.4 million. Like many firms in the highly competitive computer industry, Star found itself trapped in a vicious cycle during the 19805, a cycle that accounted for the large swings in its operating results. Stars 1989 annual report declared that the company ‘was committed to staying “in the forefront of technological innovation" in the com- puter industry Because of this commitment, Stars 1989 R&D (research and devel- opment) expenditures consumed 20 percent of its revenues. Unfortunately, rapid ‘changes in technology within the computer industry rendered many of Star's impres- sive products obsolete shorily after they were introduced. This short product life 4 cycle forced Star's executives to repeatedly “go back to the drawing board” and incur | heavy R&D expenditures. As history later proved, only a few computer manufacturers could prosper under such conditions. Siar Technologies was not among those firms. AFallen Star By the end of fiscal 1989—March 31, 1989—Star faced a financial crisis. Among the company’s major products was a computer designed for use in petroleum explo- ration, Company officials forecast that Star would sell 29 of the computers during 1989. Because of changes in computer technology and a slowdown in petroleum ex- | | ploration activities, Star sold only one of these computers during 1989 and had no outstanding sales orders for the product at yearend. Star’s poor operating results for 1989 caused the company to violate several covenants of a lending agreement with its principal bank. That bank had extended Star a $5.8 million longterm loan. The debt covenant violations accelerated the maturity date of the loan, making it imme- diately due and payable at the end of fiscal 1989. Price Waterhouse audited Star’ financial statements throughout the late 1980s, During the fiscal 1989 audit, several contentious issues arose between Price Water- house and Star's top executives. Among these issues were the refusal of Star's man- agement to reclassify the $5.8 million bank loan as a current liability. disagreements over the adequacy of Star's reserves for bad debts and inventory obsolescence, and 1. Two enforcement releases issued by the Securities and Exchange Commission (SEC) and various an- tual reports of Star Technologies Ine, provided the background facts fr this case. The partes involved in this case neither admitted nor denied the SECS reported findings and conclusions. Unless indicated ‘otherwise, the quotations inthis case were drawn frotn the lollowing source: Securities and Exchange Commission, Accounting and Auditing Enforcement Release No. 455,24 June 1998, 15 BEE TIERS Cia pt co 0 aR a| a secnONME ConrenEsve CASS Gites 1989 1988 1987 1986. 1985 SELECTED FINANCAL ee een can om 15,050 ‘$21,298 {/ Data Reporren Revenue Ssyame $3589 44050 $15,050 re by Star Operating income (2,614) 3,830 47a (17,946) ; TeciNoLoates, Net income (4393) 2.218 13% = (19.971) (8,082) 1985-1989 Working capital 13855 13,217 8,621 3,946 22,328 (000s omsrreD) Tata asats 31277 5,025 28,528 35,908 44,957 Total debt 19,796 12978 -(16,294 26,136 18,866 BIT 2 as STAR TECHNOLOGIES, INC. SOR om BALANCE SHEETS (000s omitted) Inc, 1988-1989 March 31, BALANCE SHEETS 1989 | Current assets: | (ash and equivalents $1444 | ‘Accounts receivable 5,025 | Imentory 12,962 | Other current assets 1,952 | Total current assets 71383 | Property and equipment, net 6917 | Other assets 2977 | Total assets 32.277 | a | CarentWabites: | Accounts payable 526 | ‘Accrued payroll and related — ie benefits | ee 1a vs | Defered revenue oe pk | ee 1090 233 Total current abit L030 current abilities Fase Seid | Notes payable, net ofcurent portion | Total bites ‘Stockholders’ equity: Convertible preferred stock Common stock Additional paid-in capital Retained earnings (deficit) Total stockholders’ equity Total abilities and stockholders’ equity Bee by the company Eventually, the companys aul resolved these issues to ther mute etter ho oversaw the 1989 Sta ‘issue an unqualified opinion 190 mee allowing Price Waterhouse to ancial statem,exerts 1 STAR TECHNOLOGIES, INC. ey I CONSOLIDATED STATEMENTS OF OPERATIONS (000s omitted) ‘Tectouoes, I Year Ended March 31, _‘INc., 1987-1989 i 1989 1988 _1987__INcOMe SrareMenrs See hea] «NO STIDENTS OF ; Revenue $39,006 $35,689 $44,050 | Casti Flows Costs and expenses: i Cost of revenue 22,498 17,343 25,437 } Research and development 7945 4,686 5,031 | Marketing and sales 8.206 7,363 6,118 | General and administrative 2,969 2,469 2,410 | Provision for restructuring = = 325 Operating income (loss) 25m) 3.830 4,729 Interest expense (1597) (1,453) (1.971) Other income (expense) 82) (93) __(84) | Income (loss) before income taxes | ‘and extraordinary items (4,393) 2,286 2,674 | Provision for income taxes 2,286) (1,230) | Income (loss) before extraordinary items B) 998.484 oe Utilization of NOL carryforward = 0 4290 | Provision for stockholder suit settlement = 41/300) 4 Net income (loss) $393) $2,218 $1374 il [OSE ee ee ees | ‘STAR TECHNOLOGIES, INC. i ‘CONSOLIDATED STATEMENTS OF CASH FLOWS (000s omitted) Year Ended March 31, 1989, 1988 _1987_ Cash flows from (used for) operating activities: ‘Net income (loss) before extreordinary items $(4,393) $ 998 $1,444 Extraordinary items = 41,220 (70) ‘Adjustments to reconcile net income to net ‘cash from operating activities: Depreciation and amortization 3,758 2,976 3,872 Stock issued for services - = 68 (Increase) decrease in accounts receivable (857) (896) 17% ' (increase) decrease in inventory (1,094) 4,090 1,689 Increase (decrease) in accounts payable 3,215 (3.241) 2.465 Increase (decrease) in accrued liabilities (240) (356) Tncrease (decrease) in deferred revenue (115) _232 Net cash from operating activities 2565023 Cash flows from (used for) investing activities: Deferred software and contract costs (452) (893) = Capital expenditures and other (6,654) (663) 130 ‘Advances to Culler (800) = _ ‘Acquisition of Graphicon (11) = = Net cash from (used for) investing activities (6517) (1456) 130 Cash flows from (used for) financing activities: (Decrease) increase in notes payable 6,023 (3,318) Proceeds from stock option exercises - 873 Proceeds from stock issuances a | Net cash from (used for) financing activities (a5) | Net increase (decrease) in cash and equivalents aa i 529 Cash and equivalents, beginning of year Cash and equivalents, end of yearSECTION ONE ComPREHENsIVE CASES In January 1990, Price Waterhouse’ national office received an anonymous letiet alleging that the 1989 audit of Sar Technologies was an ‘audit failure: After a brief investigation, the national office deemed the allegation unfounded. An exccullve partner in Price Waterhouses Washington, DC. ofic, which had issued the 1989 Star uit opinion, was not satisfied with the national office’ investigation and decided to pursue the matter further Following a lengthy discussion with the individual who served as the audit manager on the 1989 Star audit, he executive partner concluded that the audit had been inadequate and reported this finding to the national office. In early 1990, Price Waterhouse notified Star that it was withdrawing the audit opin- ion issued on the company 1989 financial statements. Price Waterhouse also in- formed Star that those financial statements contained material errors. Although Stars executives initially disagreed with the audit firm's conclusion, they later accepted that decision and issued restated financial statements for 1989. Price Waterhouse’s 1989 Audit of Star Technologie Clark Childers, an audit partner with Price Waterhouse since 1984, served as the en- gagement partner on the annual audits of Star's financial statements from 1987 through 1989. Childers’ principal subordinate during the 1989 Star audit was Paul Argya senior audit manager who was to be considered for promotion to partner the following year Argy assumed responsiblity fr planning and coordinating the 1989 aut, supervising the staff assigned to the engagement, and serving as Price Water house’ onsite liaison with Sars executives Te Sa au proved to bea df engagement for Ary Mroughout the au ec athe With client management over several accounting and financial reporting issues During one of those confrontations, tars management demanded that Ary be removed rom the audit Chiles refused to remove Agy—but from that point assumed larger olen dealing with ent offi when disputes arose Following a icularly heated encounter between Childers and Star management, the com pangs exces cae to dismiss Price Waterhouse. A subsequent investigation by fea as = veal me hat Star's audit committee interceded and vetoed that decision. The dissaremens betwen the PiceWatehouse auditors and cent executives dung ine 189 au inlet the following ites: R&D expenditures, the reserve fr inve tory obsolescence the resee for bad debi, cerain “mystery assets included in Stars and the balance sheet classification of a large note payable. R&D Expenditures In 1989, Star lis j colagain eta ae R&D effort with Glen Culler & Associates, a small during fiscal 1989.Theagrernent Deoneen es eat $900,000 to Culler to be repaid in 10 years and oblines ae the two companies required those funds Daler that Sar would have ao ate Culler tous the funds to develop a new com assets as collateral for the $500, ee to manufacture. Culler pledged all of its inconsequential sine Cllerhad no sours of ee Of the agreement was Stats sole customer; hada negative nex geet OF working capital other than tangible assets. Finally the ag gative net worth of nearly $200,000; and had few Tight to acquire Cue, ee°™ENt between the two companies granted Star the Stars management maintained that the $900 qualified as a note receivable an aot 000 advanced to Culler during 1989 poste 0 in“other’ assets on Star's 1989 balance Dartner reviewed the 1989 Star werk aed ee by Price Waterhouse, a second ‘orkpapers before Childers released the auditCASE LS Star TecunoLoates, Inc. opinion on the company’s financial statements. This partner questioned the decision to report the $900,000 advance to Culler as an asset in Star’s 1989 balance sheet and suggested instead writing off the advance as R&D expense in Stars 1989 income statement. The review partner then referred Childers to paragraphs 11 and 12 of State- ment on Financial Accounting Standards No, 2, "Accounting for Research and Devel opment Costs’ Listed next are excerpts from those two paragraphs. ‘The costs of services performed by others in connection with the research and devel opment activities of an enterprise, including research and development conducted by others on behalf of the enterprise, shall be included in research and development costs. If repayment to the enterprise of any loan or advance by the enterprise to the ‘other partes depends solely on the results of the research and clevelopment having ft ture economic benefi,the loan or advance shall be accounted for as costs incurred by the enterprise. The costs shall be charged to research and development expense. ‘To provide additional support for his position that the $900,000 advance to Culler should be expensed, the review partner cited the description of the agreement be- tween Star and Culler that was included in the draft of Star's 1989 financial statement footnotes, That description specifically referred to the arrangement as a “joint re- search and development agreement” ‘After meeting with the review partner, Childers consulted with Stars chief financial officer (CFO). Childers told the CFO that the description of the Star-Culler agreement included in the draft of the financial statement footnotes suggested that the $900,000 advance should be treated as R&D expense by Star. Following that conversation, Star’s CFO caused all references to the transaction as a research and development agreement to be deleted from the final version of the financial statements.The fal version described the agreement as a “working capital agreemen Childers accepted this revision without referring to the actual contract between the two parties. An inspection of that document would have revealed that the CFO's updated description of the Star-Culler relationship was misleading. The change in the footnote description of the Star-Culler agreement apparently satisfied the review partner, causing him to drop his objection to Stars financial statement treatment of the $900,000 advance to Culler. During fiscal 1990, Star acquited Culler, While reviewing this transaction, Childers and Argy discovered that Stars 1989 financial statement footnotes had not accurately Gescribed the Star-Culler agreement, Childers and Argy contacted Price Water- house's national office for advice on this matter. To provide a clear understanding of the Star-Culler agreement, Argy forwarded to the national office copies of relevant documents pertaining to that agreement. After studying those documents, a Price Waterhouse partner in the firm’s national office concluded that, at a minimum, {$400,000 of the $900,000 advanced to Culler by Star during fiscal 1989 should have been treated as R&D expense by Star? ‘The national office partner then addressed the issue of whether Stars 1989 finan- cial statements should be restated. The partner asked Childers if an adjustment to write off $400,000 of the Culler receivable to R&D expense would have materially im- pacted Star’ 1989 financial statements. Childers convinced the national partner that 2, The $100,000 amount represented the funds Star advanced to Culler ater signing the agreement giving itine night to acquire that company. The national ofice partner maintained tha since Star essentially aan ei control of Culler afer the agreement was signed, the funds subsequently advanced to Culler should have been treated as an operating expense by Star.20 SECTION ONE COMPREHENSIVE CASES such an adjustment would have had an immaterial effect on Star financial state- ments, Childers also told the national partner that an adjustment had been proposed during the 1989 audit to write off a portion of the $900,000 Culler receivable to ex pense. According to Childers, that adjustment had been waived due to its immaterial effect on Stars financial statements. ‘The SECs subsequent investigation found no evidence of the proposed adjustment in Price Waterhouse’s 1989 workpapers. Following his interaction with the national partner, Childers had instructed a subordinate to include such a proposed adjust ment in the 1989 Star workpapers. Despite that explicit instruction, the subordinate had refused to change the workpapers. Reserve for Inventory Obsolescence One of Star's original products was the S100 computer. Although a state-of:h computer when first marketed in 1982, by 1989 the SF100 was outmoded. During 1989, Star added $35 million to the reserve for inventory obsolescence for its re- maining inventory of SF100s, reducing that inventory to a net book value of $2 mil: lion, Argy and other members of the Star engagement team believed that the SF100 1 inventory was still overvalued. Argy recommended an additional $1.5 million write- 4 down for that inventory. + Stars management resisted Argy’s suggestion to write the ST100 inventory down to ' a net book value of $500,000, The client’ executives persuaded Childers that the ‘ Company would sell S7100s in the future despite not having any existing orders for ‘ that product and despite having sold only one SF100 during 1989. Star's management { also provided Childers with a list of $1 million of spare parts included in the SF100 | inventory that would allegedly be needed by Star to service previously sold ST100s. Childers accepted the $1 milion 5 illion spare parts requirer ce iad ie perform any procedures fy a pats reauirement at face value and failed t : ; mal inquiries to. support the value. With regard the emai $1 milion of obsolete S100 inwentong Childers agreed p- : 5350000 wie ye ars management an arbitrary reserve increase of ; Sy ation as to the basis for or the rationale behind, the Reserve for Bad Debis Racal 1580 Tro er at eta $5 ilon of net accounts receivable at the end of Years These recenable fone eceables had been outstanding for more than four from earlier sales of $¢100 en oe time, totaled $1,062,000 and resulted lowance f c ts. Before yearend adj ‘5 ak = ne for doubt acca totaled $673,000. After Panel balance ofthe allowance account eM disputed receivables less the existing , uit In previous years, Pri allowance ice Watethouse had count bythe value ofthe ese ANY Proposed adjustment to the the collateral for the cece ater for potentially uncollectible receiv . ‘Peeivables, two SEIOO computers, Was a justment for uncollectible receivablesCASEL.6 ‘STAR TECHNOLOGIES, INC. Star's chief executive officer (CEO) recommended increasing the allowance account $65,000 at the end of fiscal 1989. hilders agreed to that adjustment. The SEC later chal Ienged Childers’ decision to accept the modest increase in the allowance account. Childers had an inadequate basis to accept the CEO's proposition to increase the bad debt reserve by only $65,000. There was insulficient audit evidence to suggest that the remaining $335,000 of the receivables in question were collectible. In cir- ‘cumstances such as these, opinions of counsel are not dispositive evidence of collectibilty “Mystery” Assets During the 1989 Star audit, a Price Waterhouse staff auditor discovered an account entitled “Assets in Process” having a balance of approximately $435,000. A Star official told the staff auditor that the assets represented by that account involved computer equipment purchased and placed in service in 1985. However, Star could not pro- vide invoices or other documentation to support the existence or valuation of these assets, nor were any depreciation records available for the assets.* In fact, the client could not locate the assets or describe them in detail to the Price Waterhouse audit team, Star's CFO claimed that the equipment could not be identified because it had been fully integrated into the company’s existing computer facilities. “The staff auditor who uncovered the Assets in Process account noted in the 1989 workpapers that Star depreciated computer equipment over five years and began de preciating such assets in the year they were placed into service. Since the equipment purportedly represented by the account had been placed in service in 1985,the staff auditor reasoned that it should have been fully depreciated by the end of fiscal 1989. Argy agreed with his subordinate’s analysis and concluded that the mystery assets should be immediately written off to expense. ‘When Childers brought the Assets in Process account to the attention of Star's CFO, the CFO refused to accept the proposed adjustment to write off the balance of the account. At this point, the CFO claimed that the assets had actually been placed in service in 1987 rather than 1985, although he could provide no evidence to sup- port that assertion. Instead of accepting the proposed $435,000 adjustment, the CFO Offered to record $100,000 of depreciation expense on the assets in 1989 and write off the remaining $335,000 cost of those assets over the following four years, Childers accepted the CFO's proposal. Classification of Note Payable Star's poor operating results for fiscal 1989 resulted in the company violating seven debt covenants included in the loan agreement with its principal bank. These debt covenant violations caused a $58 million bank loan to be immediately due and payable,as noted earlier. On June 15,1989, Price Waterhouse completed the 1989 Star padit: however Childers refused to issue an audit report on Stars financial statements tint the company’s bank waived the debt covenant violations.On June 29, 1989, Star faxed Price Waterhouse a waiver obtained two days earlier from its bank, ‘The waiver covered only a fivemonth period, but also stated that it was not the bank's intention to accelerate the loans by virtue of defaults existing at the 1989 fis cal yearend. Ate reviewing the waiver the audit senior told Childers that in his opin- fon the waiver was not adequate to classify the loans as a longterm liability ee 3 Pce Waterhouse had identified this account in earlier aucits but apparently made no effort to ‘corroborate the given assets existence or valuationTS lle SSS eee Comprenieusive Cases Nes SECTION ONE Childers disagreed with the audit seniors conclusion, Because the bank stated that it had no intention of making the $5.8 million loan immediately due and payable, Childers believed the loan qualified asa longterm liability Shortly after receiving the bank waiver, Childers signed the unqualified audit opinion on Star's 1989 financial statements, dating the opinion as of June 15. Star included that opinion in its 1989 Form 10K filed with the SEC. Where Was Argy? Paul Argy left the Star audit engagement approximately one week before the 1989 audit was completed to begin work on a new assignment in another city. Argy re tured to Price Waterhouse’ Washington, D.C., office on July 10, more than 10 days after Childers issued the unqualified opinion on Star's 1989 financial statements. Upon Argy’s return, Childers instructed him to complete his review of the workpa- pers for the Star audit and to sign off on the “audit summary” for the engagement. ‘APrice Waterhouse policy required the audit manager on an engagement to sign off on the audit summary document after completing his or her review of the workpa- pers. Argy initially refused to sign off on the Star audit. Argy had contested several of the questionable decisions made by Childers during the 1989 Star audit and be- lieved that the 1989 workpapers contained “materially incorrect conclusions. Finally, after several confrontations with Childers, Argy capitulated and signed off on the Star workpapers and the audit summary. 1Aprgsdqbo AS=AIse/ASuo9'sounpenb-aFeTuao/:dnu & & & EPILOGUE 2 3 Price Waterhouse recalled is opinion on Stars desist ord a ted the T 1989 financial statements on March 9, Fe eaeelos, tar, thet prohibis J following month, the comment 4 890-The company from future violations of the federal z issued financial staterea ns management securities laws.Paul Argy received an 1&month : spprenrcrents for fiscal 1989 that suspension from practicing before the SEC. fee dee cPmoPriae adhismenty forthe while Clark Childe seesied a fveyedl items discussed earlier Stars amended 1989 in. — ee ‘come statem lion rahe than he S44 mie es Tat commenting on Argy’s involvement in he reported. On March 28,1990 en les ogaly 1989 Star audit, the SEC complimented him for issued an unqualified audit opinion nee ‘ecommending that Star make several large and raced B® fnancll siemens, One weak gates, SHSTENS 10 ts 1989 finance later Star dismissed Price Waterhouse and re, men's 8 cet & Lybrand as its independent '%Y Acted properly in insisting on material 2 sat fen adjustments to Stars financial statements, Financial statene et” Of Stars original 1ggg"Otwithstanding strong opposition to those nancial statemet nts and its 1989 audit culm 's being imposed on both Star members of the 1989 audit The SEC issued a cease and nated in sanction: and the two key engagement team. — eis «010A ppeaion gun bi *deral agency See. ‘Securities and Exchang ane ‘No. 1130, 22 Aprit 1999, oe Proposed adjustments by Stars CFO. He Property recognized and contronted Childers with ‘his belief that the audit conclusions were improper and the audit evidence was insufficient, Practice before the SEC was approved by the + Accounting and Auditing Enforcement ReleaseCASES ‘StaR TECHNOLOGIES, INC. ‘The SEC went on to chastise Argy for signing off on the 1989 Star audit workpapers when he believed they contained materially incorrect conclusions. Instead of signing off on the Star workpapers, the SEC maintained that Argy should have diss0o- ciated himself from the Star audit. That option ible to him since Price Waterhouse had a “disagreement procedure” allowing audi- tors on an engagement to explicitly dissociate themselves from any decision with which they did not agree. The SEC suggested that Argy may have allowed his desire to be promoted to part ner cloud his professional judgment, ‘An independent accountant, including an audit manager, cannot excuse his failure to ‘comply with GAAS because of a sense of fu- tility after his proposed approaches to cer- tain accounting issues are repeatedly re- jected... The audit manager may encounter pressure to compromise audit standards and may encounter frustration in dealing with partners and clients. The audit manager may also sense that his response to those pres- sures may adversely affect his opportunity for advancement. However in fulfling his re- sponsibilites, the audit manager plays a cru- cial role in ensuring that an audit repor is is- sued only when the audit was in fact conducted in accordance with GAAS. By imposing a_fiveyear suspension on Childers, the SEC affirmed that the audit partner shouldered a greater degree of responsibility for the 1989 Star audit than did his subordinate, Argy Following are the specific allegations of misconduct that the SEC filed against Childers. 1. Failing to ensure that sufficient competent evidential matter was obtained to afford a reasonable basis for his conclusions 2. Failing to exercise due professional care and sufficient professional skepticism in the performance of the audit 3, Failing to assure that the financial statements on which Price Waterhouse issued an unqualified opinion were prepared in accordance with GAAP 4, Responding without an adequate basis, to the questions of the second partner reviewer when issues were raised about the agreement with Culler 5. Instructing Argy to sign off on the audit regardless of Argy’s stated disagreement with the conclusions reached by Childers 6, Making misleading statements to the Price Waterhouse national office concerning its investigation of Stars agreement with Culler 7. Instructing a Price Waterhouse audit manager to make inappropriate alterations to workpapers Star Technologies’ financial condition steadily worsened in the years following its unpleasant encounter with the SEC. The com- pany’ computer manufacturing operations never became economically viable. At last re- port, the company had fewer than two dozen employees and its principal line of business was the development of computer software. Questions 1. Explain why “industry knowledge” so important to an audit engagement team. Identify risk factors commonly posed by compani in high-tech industries 2. Review StarTechnologies' financial statements included in Exhibit 2 and Exhibit 3. What changes in Star financial status between fiscal yearend 1988 ‘and 1989 should have been of concern to the company’s independent auditors? How should these changes have affected key audit planning decisions for the 1989 Star audit? 3, Review Star's statements of cash flows shown in Exhibit 3.What information can auditors obtain from a client's cash-flow data that is relevant to the audit plan developed for the client?AAgnuos'soujenb'a8eSus9//:dny Pold=CIASP!4EPANAPIDSdqbO AS: ara 600: SECTONONE COMPREHENSIVE CASES SAS No, 106, “Audit Evidence? identifies the “management assertions” that may be explicit or implicit ina set of financial statements and accompanying footnotes. What management assertions were invalid in Star's original 1989 financial statements? Explain Stars bank indicated in the waiver of the debt covenant violations that it did not intend to accelerate the maturity date of the $5.8 million loan.Was that statement a sufficient basis for classifying the loan as a longterm liability rather than as a current liability? Defend your answer. Briefly describe the nature and purpose of the audit review process. Identify any breakdowns that occurred in the audit review process during the 1989 Star audit. How should disagreements between members of an audit engagement team be resolved? What mistakes, if any, were made by Childers and/or Argy in resolving the conflicts that arose between them during the 1989 Star audit?