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Solway, Inc. Ben Davis is an internal accountant at Solway, Inc., a pub- licly owned company headquartered in Fresno, California. Ben reports to Chris Hodgins,

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Solway, Inc. Ben Davis is an internal accountant at Solway, Inc., a pub- licly owned company headquartered in Fresno, California. Ben reports to Chris Hodgins, the controller of the company; Hodgins reports to the CFO, Harry Benson; and Benson reports to George Lee, the CEO. Solway has a three-person independent audit committee that deals with financial over- sight issues, including being a direct access group for matters of concern for the chief internal auditor, Sam Vines. acc als ask for Ol Th inc On January 15, 2014, Davis is approached by Hodgins and de told to record an accrual for unpaid bonuses and severance th payments of $50 million to be included in the December 31, 2013, financial statements. Davis asked Hodgins to explain the reason for what appeared to be an unusually high amount of money and was told the company planned to shut down a A division in 2014 and the severance payments would be sig- al nificant. This was the first Davis heard about a shutdown of (C any division, and he found it strange because the company's operating income in all divisions had set record levels in fis- cal year 2013. Moreover, the bonus and severance amounts are five times the annual payroll of the division. The numbers below show the operating income levels and accruals for 2011 through 2013 12/31/11 12/31/12 12/31/13 Operating Income Accrued bonus and severance $100 million $120 million $200 million $10 million $12 million ??? Davis did not commit to recording the accrials because he wanted more time to think about the situation. Fortunately Hodgins was called away on an urgent matter, bringing th 3

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