Topics: Auditing, Audit, Internal audit Pages: 18 (4658 words) Published: July 12, 2015
Hollate Manufacturing
Case Study

About this case study:
This case study was developed as a joint effort by the Center for Audit Quality, Financial Executives International, The Institute of Internal Auditors, and the National Association of Corporate Directors. These four organizations have formed the Anti-Fraud Collaboration to actively engage in efforts to mitigate the risks of financial reporting fraud. The Collaboration’s goal is to promote the deterrence and detection of financial reporting fraud through the development of education, programs, tools and other related resources. For more information about the Anti-Fraud Collaboration and its resources please visit www.AntiFraudCollaboration.org.

© Copyright 2013

Jack Brennahan had his dream job. He had always wanted to head a manufacturing company and five years earlier he received that opportunity at Hollate when he was promoted from the CFO position. He enjoyed the work, the exciting environment he had helped create, and the people around him. As CEO, however, Brennahan understood that the buck stopped with him. He took his responsibilities seriously both in running a successful business and ensuring that the business met all regulatory requirements and ethical expectations of being a good corporate citizen. He never wanted to be ashamed of anything he read in the newspaper about Hollate. Brennahan, however, had just received a call from Cara Porcini, Hollate’s external auditor, followed immediately by a call from Mike Soltany, Hollate’s audit committee chair. They had news that stopped him cold.

Hollate began manufacturing products for the home
construction industry in the 1950s. For most of its
history it comprised one division that made windows
and doors for the Southeastern region of the United
States. These products were sold under several privatelabel and store brand names. Seven years earlier, two years before Brennahan became CEO, Hollate acquired
a Midwestern door and window manufacturer that also
had a division that made roofing products. The acquisition
enabled Hollate to gain access to new geographic and
product markets, and also gain economies of scale in
management and in raw material purchasing. Following
this acquisition, Hollate held an initial public offering
(IPO) and became a public company. Hollate used
proceeds from the IPO to acquire a manufacturer of
home siding products, a manufacturer of prefabricated
sheds and garages, and two other smaller home
construction product businesses.
In recent years a downturn in the housing sector
impacted the entire home construction industry,
including the manufactured products segment. Hollate
had taken a hit in both its revenue growth and profit
margins, but overall it had fared better than its peers.
In hindsight, Hollate might have overpaid for that first
acquisition which had occurred before the downturn.
Its subsequent acquisitions, however, were made on
favorable terms as they came after the early days of the
downturn had driven down the valuations of many
Hollate now had 14 divisions throughout the U.S. and
Canada. It had 2,100 employees, sales of $1 billion,
profit margins in line with historical industry norms,

and a market capitalization of approximately $1.5 billion.
With one or two exceptions, each division was profitable
and was maintaining market share.

CEO Jack Brennahan and the
Management Team
Brennahan had joined Hollate ten years earlier as CFO
after working his way through several management
positions and promotions at two other firms. While his
background was in finance and accounting, he always
considered himself a general manager. As CFO, Brennahan
had played a leading role in integrating Hollate’s first
acquisition and making it a success both operationally
and financially. He also played a leading role in taking
Hollate public and identifying its other acquisitions.
When the previous CEO retired,...
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