The Midnight Journal Entry

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How should a chief financial officer respond when he uncovers a serious accounting fraud? Richard Okumoto, the newly-appointed CFO of Electro Scientific Industries, Inc., learned that around midnight several months earlier, a group of managers, led by a man who later became CEO, had reversed an accrued liability associated with the anticipated cost of employee retirement benefits. This "midnight journal entry" had allowed the company to report a gain, rather than a loss, for the quarter. Okumoto believed that the reversal was improper and the company's earnings should be restated. When he approached the CEO, the general counsel, and the audit committee with his concerns, however, he was told to "just get past it." Okumoto had to decide how best to act on his conviction that the company had committed an unethical and illegal act, while minimizing the risk to himself and his future career prospects.
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