Case 5-1 Loyalty and Fraud Reporting (a GVV case)

Assume Ethan Lester and Vick Jensen are CPAs. Ethan was seen as a model employee who deserved a promotion to director of accounting, according to Kelly Fostermann, the CEO of Fostermann Corporation, a Maryland-based, largely privately held company that is a prominent global designer and marketer of stereophonic systems. The company has an eleven person board of directors. Kelly considered Ethan to be an honest employee based on performance reviews and his unwillingness to accept the promotion, stating that he wasnt ready yet for the position. Kelly admired his willingness to learn and grow, not just expect a promotion. Little did she know that Ethan was committing a $50,000 fraud during 2015 by embezzling cash from the company. In fact, no one seemed to catch on because Ethan was able to override internal controls. However, the external auditors were coming in and to solidify the deception, he needed the help of Vick Jensen, a close friend who was the accounting manager and also reports to Ethan. Ethan could order Vick to cover up the fraud but hoped he would do so out of friendship and loyalty. Besides, Ethan knew Vick had committed his own fraud two years ago and covered it up by creating false journal entries for undocumented sales, returns, transactions, and operating expenses. Ethan went to see Vick and explained his dilemma. He could see Vick's discomfort in hearing the news. Vick had thought he had turned the corner on being involved in fraud after he quietly paid back the $20,000 he had stolen two years ago. Here is how the conversation went. Vick, I need your help. I blew it. You know Mary and I split up 10 months ago. Yes, Vick said. Well, I got involved with another woman who I tried to impress by buying her things. I wound up taking $50,000 from company funds. Ethan, what were you thinking? Dont get all moral with me. Dont you recall your own circumstances? Vick was quiet for a moment and then asked, What do you want me to do? I need you to make some entries in the ledger to cover up the $50,000. I promise to pay it back, just as you did. You know Im good for it. Vick reacted angrily, saying, You told me to skip the bank reconciliationsthat you would do them yourself. I trusted you. I know. Listen, do this one favor for me, and Ill never ask you again. Vick grew increasingly uneasy. He told Ethan he needed to think about it his relationship with the auditors was at stake.

Questions

1. Analyze the facts of the case using the Fraud Triangle. Would you characterize what Ethan Lester did as a failure of internal controls? Explain.

2. Assume Ethan sets a meeting with Vick in two days to follow-up on his request. Vick has decided not to be part of the cover-up. Use the GVV framework to help Vick prepare for the meeting.

Consider the following:

What should Vick say to counteract Ethan's request?

How might Vick's intended action affect the company and the external auditors?

Who can Vick go to for support?

3. Assume Ethan gets upset after the meeting and decides to fire Vick. He tells Vick to leave quietly or Ethan will disclose the $20,000 fraud. What should Vick do next? Vick should do the right thing and go and confess everthing to Kelly before Ethan.