Leslie Fay, the dressmaker, had a compensation plan that offered the chief operating officer and the chief financial officer bonuses if the company’s net income reached $16 million (approximately 2 percent of sales). The company reported a net income of $23 million, and the two executives received bonuses.

However, much of the net income was fraudulent, resulting from recording sales that had not occurred.

The fraud occurred away from corporate headquarters in New York at the company’s Wilkes-Barre, Pennsylvania, office where the company’s finances were handled. Leslie Fay’s chief financial officer set up an autocratic rule in Wilkes-Barre. The chairman and chief executive officer of the company, who was paid $3.6 million, mostly in the form of a bonus, said he was bewildered by the accounting scandal.

Required

a. What effect might the bonus plan for the chief operating officer and chief financial officer have had on the fraud, if any?

b. How might the location of financial operations in Wilkes-Barre, Pennsylvania, instead of at corporate headquarters in New York have made it easier for someone to commit fraud?