On March 24, 2020, the Australian Securities and Investment Commission (ASIC) announced that Quantum Innovation Computers Sydney (QICS), and its founder, chairman and CEO, Craig Delahue would pay fines of $50m and $3m respectively to settle allegations of improper accounting practices. ASIC claimed that the company manipulated accounting information over an extended period to show much better financial results than the company actually achieved, and that this breached Australian Accounting Standards. The company neither admitted nor denied guilt as part of the settlement(common practice in such deals), but did say that it believed it had not breached Australian Accounting Standards. ASIC also barred two of the senior accountants involved in the case from practising for three years, and another senior accountant for two years.

ASIC found that senior management engaged in improper accounting by maintaining a series of secret reserves that QICS used to meet operating revenue and expense forecasts. Some transfers were treated as revenue, and others were treated as expense reductions. The reserves themselves were actually funded by payments from a microchip manufacturer in Perth (Virginia Microchip Manufacturing Solutions, VMMS) to QICS for QICS to use VMSS's CPUs exclusively in its products. Payments like this are not illegal under Australian law. Payments grew from 8% of QICS's operating profit in financial year 2015 to 24% in 2018, and peaked at 56% in the first quarter of its financial year 2019.

QICS's accounting policies made it appear that for 17 quarters it was consistently meeting its profit targets and reducing its operating expenses through the company's management and operations. As a result, the share price of QICS doubled between 2015 and 2019.In reality, QICS's success had little to do with the company's strategy, products, or operating efficiencies. Rather, it was the result of QICS's quarterly requests for increasingly larger exclusivity payments from VMSS.

VMSS ceased its payments when QICS agreed to buy microchips from its competitor, Adelaide Microchip Excellence Production (AMEP) in January 2019. As a result, QICS's operating profit in the second quarter of 2019 dropped 75%. However, rather than disclosing the true reason for the fall in profits, QICS claimed that it had priced products too aggressively in the face of slowing demand, and that component costs were more expensive than expected. As part of the action taken against QICS, ASIC forced the company to restate profits for that quarter to $150 million (by approximately $50 million). The QICS share price dropped by 75% following the announcement.

Throughout the period in which these accounting practices occurred, Craig Delahue was among the highest paid CEOs in Australia, earning more than $250 million, most of it from stock option gains. Hugh Powers, former CEO of QICS, who was also fined $3 million, subsequently left QICS with a cash payment of $33 million in compensation for expired options. A press release from QICS stated that the options could not be exercised while the ASIC investigation was ongoing.

a)Explain the major underlying ethical dilemma concerning Accounting Information Systems (AIS) in this case. [HINT 1: There are multiple ethical issues in this case, but you only have to explain the one relevant to AIS practice]. [Hint 2: Note that the underlying issue is not stated explicitly in the case. For example, the exclusive trade agreement is unethical, but that is a fact of the case, not an explanation. Your answer must explainwhythe behaviour you have identified is unethical].

b)Senior managers arguably had multiple motivations for the actions described in the case. Identify at leasttwo(2)possible motives for the behaviours described in the caseandexplain how these motivations conflictedwith the interests of at leastfour (4)other parties (or stakeholders). [HINT: It is recommended that you answer this question in a format similar to: "the desire of senior management to...is in conflict with the interest of... to...".Hence, the nature of the four conflicts (4) is expected to be spelled out].

c)Recommendtwo (2)courses of action that QICS senior management could have been taken whenASIC announced that QICS was going to pay fines (24 March 2020)andthe consequences of each option.

d)The people involved in this case may claim that they were motivated by a desire to ensure that shareholder wealth was maintained, which is a basic principle of the COSO Enterprise Risk Management (ERM) framework.Explainhowdeficiencies in the implementation of any of thetwo (2)elements (principles) underlying theInternal Environmentcomponent of the COSO ERM framework (top level of the framework) may have contributed to the problems described in the case study.