ACCOUNT 777 Fraud from the Managers Perspective

Case Analysis 1

Norfolk Inc. is a $1 billion corporation with a December year-end. The Westerly Division has annual sales of $100 million, with annual before-tax operating profit of $12 million. In September, the Westerly Division general manager (GM) realized the division would need strong performance in the last quarter of the year to reach budget targets. The GM is considering five different independent alternatives (a-e): a. Instruct manufacturing to work overtime in December so everything possible could be shipped and invoiced by the end of the year. b. Implement a sales program offering liberal payment terms to pull sales that would normally occur next year into the current year. Customers accepting delivery in the 4th quarter of the current year would not have to pay the invoice for 120 days. c. Record investment income as operating revenue. d. Adopt a new accounting standard that would result in a large one-time gain. e. Not write-off obsolete inventory.

ANALYSIS REQUIREMENTS 1. (25 points) Analyze each alternative (a-e) independently. How would you classify each alternative on the scale that Dechow and Skinner (2000) developed to distinguish between earnings management and accounting fraud? (discussed in assigned reading, Ajekwe and Ibiamke (2017)) Support each of your classifications with logical reasoning. 2. (5 points) Discuss the party (or parties) with responsibility for oversight in this scenario and recommend action(s)/response(s) for each responsible party. Support your recommendations with logical reasoning.

GENERAL REQUIREMENTS Prepare a typewritten report of approximately 2 pages to address the analysis requirements. Your report should exhibit professional language, grammar, and organization. Responses should reflect application of critical thinking and logical analyses. Properly cite and provide a reference list for any outside sources (reference list does not count toward 2 pages).