QUESTION 5

Assume that the local newspaper just ran the following headline and article: "Audit Results: Airport executives from Kentucky racked up $500K in lavish expenses, concert tickets, and even gentlemens club tabs"

LEXINGTON, Ky. (AP)A small commercial airport in Kentuckyand the taxpayers who support itpicked up top executives tabs in recent years for Hannah Montana concert tickets, Nintendo Wii video game bundles and even a $4,400 gentlemen club check, according to a state auditors report.

The report released Wednesday outlines indulgences ranging from pricey electronics and exercise equipment to lavish meals and champagne. In three years, officials tallied more than $500,000 in questionable personal expenses. [Note: General fund expenses were approximately $10,000,000 annually.]

Kentucky Auditor Crit Luallen said the former executive director at Lexingtons Blue Grass Airport created a culture of wasteful spending so vast, employees sometimes were paid twice for the same expense and used airport credit cards as if they were personal checkbooks. I dont think we have ever seen an audit where so many different individuals involved in the management of a public agency abused the trust with such arrogance and lack of ethical standards, she said.

Luallen says she has forwarded the case to the Kentucky attorney general, the U.S. attorneys office, and the FBI.

Although the audit only covered the past three years, it does refer to one of the more glaring examples reported by the Herald-Leader: a $4,400 charge Michael Gobb and two other directors incurred at a Dallas strip club in 2004. The charge, which appeared on the credit card statement of the airports director of planning, was listed as going to Millennium Restaurant. The word marketing was handwritten next to the amount. The Associated Press obtained that receipt and others through an open records request.

The audit found that airport employees also used the coffers for tuxedos and other expensive clothing; more than 400 DVDsmany of them currently missingfor the internal airport library; $14,000 in holiday hams given out as gifts; and $7,400 for a NASCAR driving experience excursion for staff described as team building.

More than 92 percent of the things Gobb charged to his airport card lacked proper documentation, Luallen said. While Luallen acknowledged that Gobb was responsible for the free-spending culture, she said the board and its public accounting firm should have supervised the airport more closely.

Source: Excerpted from Ky. Airport Execs Racked Up Lavish Expenses, Jeffrey McMurray, Associated Press, February 26, 2009.

Required:

Discuss the role of the board of directors in monitoring the behavior of a chief executive officer.

If the chief executive officer has subordinates who incur expenses that he or she approves, how can the board prevent abuse?

Should external auditors be expected to detect abuses such as these?