A complete audit report of the North Pole facilities of Santa Enterprises is included in your audit committee package. However, because of the serious nature of the findings, we want to provide an overview of some of the more significant issues.
As you know, our organization purchased Holidays Inc. at the beginning of last year. After the purchase, it was found that much of the due diligence that should have occurred prior to approving the purchase was … lacking. I do not need to remind the committee of the lawsuits regarding increased tooth decay as a result of activities related to Halloween Industries, the significant impact on production from the ironically named Labor Day LLC, and the questions still surrounding the ability of a rabbit to produce eggs for Amalgamated Easter Productions.
Therefore, after a more in-depth review of the subsidiaries related to Holidays Inc., we agreed the greatest risk resided with Santa Enterprises, operated by one Mr. Kris Kringle. This was based on the organization's ill-defined business model and its site location — a site so remote that no record of it could be found.
After a concerted effort by the audit staff to locate the headquarters — an effort that included sled dogs, polar bears, and numerous cases of acute frostbite — we found the organization's headquarters at the North Pole and conducted our audit. Following are some of the more serious concerns.
In an initial conversation with Mr. Kringle, we immediately noticed he exhibits the signs of several potential health issues. It was impossible to determine his age, but it is well known that he has been the sole owner of the operation since its inception, meaning his age is quite advanced. He is definitely suffering from obesity and, based on a discussion in which he admitted to a significant intake of cookies and milk once a year, may be a candidate for diabetes. He also smokes a pipe, and the redness of his nose may be indicative of an alcohol problem. Mr. Kringle is in denial regarding these health issues, responding when questioned, "Yes, but look how rosy my cheeks are." The board may want to consider purchasing key person insurance.
Documentation within Santa Enterprises is, for all intents and purposes, nonexistent. When asked for support for the enterprise's activities, Mr. Kringle was only able to provide one item, a list he stated was used to determine distribution of the products produced by the enterprise. This "Naughty and Nice" list is handwritten with numerous strikeouts and corrections. No controls exist to ensure corrections are accurate, nor to ensure that the proposed purpose of the list — controlling the reception of gifts — is actually accomplished.
Similarly, there is no documentation regarding expenses. Based on our physical inspection, expenses would seem to be quite significant, including raw materials for construction of the toys that make up the company's primary product line, care and feeding of livestock used in transportation of finished products, upkeep and maintenance for the factory and associated living spaces (expenses that would have to be exorbitant based on harsh conditions in which the site is located), and salary and other support for the extensive staff used for production and support.
Related to the staff, there is no evidence of a human resources department, nor any other function to serve in that capacity. Accordingly, we were unable to determine the true status of any of the staff — full-time, part-time, salaried, hourly, independent contractors, or indentured servants. The inability to prove the status of the staff could result in violations and fines from the Equal Employee Opportunity Commission, National Labor Relations Board, and an organization the staff referred to as "The Benevolent Order of Elfdom." One other comment regarding the staff: For some unexplained reason, they are all quite diminutive. With no records regarding hiring practices available, the company risks potential discrimination lawsuits from individuals who feel they may not have been hired because of their greater height.
With the lack of documentary evidence, the auditors spent extensive time interviewing the staff and closely watching workflows. However, no source of income could be identified. The simple fact that the operation has continued to function for a significant number of years indicates some type of income exists, but where it comes from has left the auditors baffled.
This leads to the greatest concern. The lack of documentation, the inability to discern a source of income, the remote and almost undiscoverable location, and the inability of anyone to answer the simplest questions about operations raises serious concerns about what may actually be occurring within the company. While we were unable to find any proof, the implied secrecy of operations is a strong indicator the company is involved in potentially illegal operations.
We attempted to discuss these results with Mr. Kringle, as well as develop potential corrective actions. However, he responded to all issues and questions with nothing more than hearty laughter — laughter of such magnitude that it made his belly shake like jelly.
We see no option but for the company to immediately take over all operations — relieving Mr. Kringle of all responsibilities — and begin a program of close examination to determine how Santa Enterprises continues to exist, including what illegal activities may be taking place. Unless significant mitigating information is discovered, we feel the only option will be to shut down …
[The transcript indicates an interruption at this point. A knock at the door and a hurried discussion.]
What's that? A package has arrived for me? From the North Pole?
[There is the rustling of wrapping paper.]
No. it can't be. How did he know? How could he … I've asked for this for years. But no one could have known. And there's nowhere to get. … How did he? …
Gentlemen, I have just received a signed first edition of Larry Sawyer's The Practice of Modern Internal Audit. And there's a note. "To the best CAE that has ever visited my humble operations. Work hard, work diligently, and work toward good. Kris."
[There is a long pause.]
Gentleman, I wish to retract my report. Santa Enterprises is one of the finest operations I have ever seen. Don't do a thing to change it. It does, indeed, have a sustainable business model — the bringing of joy to everyone during the holidays.
I think this meeting is over. Merry Christmas to all, and to all a good night.