ACQUIRING GOOD ETHICAL JUDGMENT 159 SCENARIO 5 o AUTHORIZES YOUR PAYCHECK?" whom does an internal auditor report? is ?. it The Situation William company. It's of the nature of the book printing business that a printer will be McGee is an internal auditor for Premiere Printers, a book printing distributing books and then taking books back in return. That is, from conantythe an accounting perspective, the company is constantly creating receivables and crediting against receivables. And when books are printed with flaws, there will be a run of books such that a customer has a claim against the company. The customer will regard himself as not obliged to pay the full amount of the original invoice. The accounts receivable clerk (who, at Premiere Printers, is a CPA) will therefore be constantly adding receivables and crediting receivables, without knowing exactly how many are valid, and to what extent, at any time. Thus, an important job for the internal auditor of such a company will be to insure that the accounts receivable clerk is accounting for these appropriately When William McGee is doing his review of accounts receivable at Premiere, he discovers many instances, in large accounts, in which a customer alleges a claim against the company for flawed book production and therefore pays less than the original invoice. (For instance, the customer is billed $50,000 but pays only $45,000, regarding this as in complete satisfaction of the original invoice.) But this lesser payment has been accounted for, not by crediting it against the original invoice, thus revealing a shortfall, but rather by crediting it against the carried over receivable from a prior impaired transaction, thus hiding potential write-offs cGee sees that this has been going on for some time and that the receivable balance has become less and less collectible. When McGee investigates further, he discovers that the accounts receivable department is understaffed and for some time has lacked the resources t determine the extent and validity of customer's claims. Moreover, he learns that the CFO, in light of this, has instructed accounts receivable to regard all invoices as collectible and to apply current payments to carried-over balances. The CFO has set down this policy in part because he is hard-nosed and dismissive of customers claims, thinking that they lack basis, and in part because the policy leads to a reporting of strong profits for the company, for which the CFO has already received several large bonuses