Ethel Spikes works for Hard Rock Candy Company. She enters customer orders in the company’s accounting system. The orders are written on prepared forms by the company’s sales representatives (reps). The company employs ten sales reps, who work different territories. The reps are paid on a commission basis for sales made during the preceding month. Sales reports prepared by the accounting department supervisor are used to determine the commissions. Sales reps drop off the forms with the accounting supervisor each week. The supervisor then delivers the forms to Ethel. She enters the orders in a computer and prints out a sales report and sales invoices for each customer. These are picked up by the supervisor, who delivers them to payroll and to shipping. The result of entering the orders in the accounting system is to increase accounts receivable and to increase sales revenue. Ethel has discovered an interesting regularity in some of the orders. One of the sales reps always reports abnormally high orders from a particular customer. A few days after the end of each month, the rep submits a cancelation form for the customer to eliminate a large portion of the customer’s order. The supervisor directs Ethel to record the cancelation by reducing accounts receivable for the customer and recording an increase in an operating expense account. Ethel doesn’t know much about accounting. When she asked her supervisor about this procedure, she was told that it was standard for this customer and not to worry about it. Ethel smells a rat, however, and has considered discussing the matter with the vice president for finance. But she is concerned she may simply be making waves that will alienate her supervisor.

Required
Ethel has sought your advice, as a friend, about this matter. What would you recommend to Ethel? What problems do you see in Hard Rock’s accounting system? How might these problems be solved?