Make sure to use three academic resources, and Harvard in-text citation (500-700 words)
“In the case of “Don’t Play Games”, what are the ethical issues raised by the current situation? What are the alternatives for action that the Controller and CEO could take, and which one would you choose? Refer to the AFP Code of Ethics as a source for analyzing these issues. Be sure to consider the position of all stakeholders that are materially affected when formulating your answer.”
MINICASE: ACCT – 05
BUSINESS ETHICS PROGRAM
Don’t Play Games!
Fraud in Financial Reporting Systems
Characters: Russ, President
Monica, Vice President-Small Business Loans at local bank
Rick was hired as Controller to help sort out and organize the records of a $7 million dollar
medical supply firm. This company was recently extended a $1,000,000 small business loan
to acquire the assets of a competitor that was going out of business. In Rick’s view, the
acquisition was a financial mess. Inventory records were misplaced or inaccurate, and no one
could figure out the accounts receivable, most of which were over 45 days past due.
Although salesman from the acquired firm were retained, a sales decline in the industry and
poor management of the new firm led to attrition of the best and brightest individuals.
Because of the sales decline, the bank was pressing to know more about the consolidated
entity’s current financial situation. Monica, the bank Vice President in charge of the loan,
and her staff of bank auditors were in daily contact with Rick. Each morning, Rick was a bit
nervous about that days’ cash draw since the firm really played the float. Moreover, Russ,
the President, would often hold large vendor checks in his desk drawer without telling Rick.
Although the financial resources were strained at best (the firm had trouble reimbursing
petty cash), there was a sense of optimism within the organization. As the company
penetrated the nursing home industry, it was pulling in enormous profits from Medicare due
to markups at eight times its costs. As a result of these sales, the firm would start earning a
small profit in the fourth quarter. Even at the end of the year, however, Russ did not want to
mention these sales figures to the bank or accrue the revenue and accounts receivable until
the checks arrived, because he was unsure when the government would be paying for the
goods, and more importantly, because he wanted to have something in his back pocket in
case the bank wanted to foreclose. Furthermore, Russ, as the majority stockholder in the
firm, was concerned he would lose the firm if bankruptcy proceedings should start.
After a few months of recording sales on a cash basis, Rick started slipping hints to the bank
that the company’s financial status was better than was reported. Still, it was not his
company, and he needed to keep his job. He knew that Russ would “play games” with other
people, but he would not appreciate other people’s “playing games with him.” Moreover,
Russ did not trust new employees, and Rick knew he would have to “earn” the President’s
G. Stevenson Smith, Ph.D., CPA, CMA, Professor of Accounting, West Virginia
Co-author: Curtis Jay Bonk, Ph.D., CPA, Assistant Professor of Educational Psychology,
West Virginia University
1992 Arthur Andersen & Co, SC. All rights reserved.