These are accounting standards.

  
    

Mike gets involved right away in investigating EcoPak's suspected fraud, since it relates to the production operations. He and Nina describe to Tariq various changes they implemented during the prior year to make their production much more efficient in terms of the conversion of raw biomass material into finished packaging stock. EcoPak's engineers developed an innovative new process that increases the air component of the final packaging material without increasing its volume or reducing its strength. This process has now been patented. They expected the new process would drastically increase their overall contribution margin but were puzzled about why it seemed to just stick around the same percentage as before. When Mike and Nina started to dig into the production cost records and variances, they noticed that the volume usage of the key raw material had decreased as they had expected, but its costs had increased, thus offsetting any volume gains. On further investigation, they found that the main cost increases were in Page 241 the raw material that is purchased solely from the plant that Zhang owns. When they told Zhang about these discrepancies, she immediately launched an investigation that revealed that the accounts receivable manager at her plant had been adding a percentage to the selling prices of the material above the approved price list. Mike and Nina investigated on the EcoPak side and found their accounts payable manager had been approving the payments for these higher amounts. When they asked her why she had been approving what amounted to unauthorized overpayments, she apologized profusely. She had been using her authority to override the controls but never thought it would amount to a big enough difference to hurt EcoPak's profitability. She related how the accounts receivable manager at Zhang's plant had been her boyfriend. When she told him about EcoPak's new process that would lead to them purchasing lower quantities of the material his company supplies to them, it gave him the idea for the scam. A lack of segregation of duties at his company allowed him to inflate the selling prices and then skim off the excess amounts when he received the inflated payments from EcoPak. But for his scam to succeed, he needed his girlfriend to override the controls at EcoPak. She said they used the money at first to do a bit of gambling and take a luxury cruise. Then, about two weeks ago, she confronted him about stopping the whole scheme because it was starting to seem really bad, and they broke up. Zhang was absolutely outraged when she heard the whole story: "Both of these people are stealing from our company. They must be fired instantly, and I will do everything I can to see that they never work again in our industry!" While Tariq feels very bad that EcoPak had to experience such a tawdry fraud, he realizes that the incident shows EcoPak does have some strong management-level controls: Mike and Nina's monitoring of the costs and variances allowed them to notice right away that their reported results did not mesh with what had been going on in their operation. And there was a control over paying the authorized prices-it had to be overridden by collusion for the fraud to proceed. However, he also realized that even the best controls can be overridden by those given the authority and trust to apply them. For Tariq, this