THORIZES YOUR PAYCHECK nim SCENARIO 5 "WHO AUTHORIZES To whom does an in w does an internal auditor report? at is tax The Situation William McGee is an inter company. It's of the constantly distributing an accounting perspective is an internal auditor for Premiere Printers, a book printing To's of the nature of the book printing business that a printer will be distributing books and then taking books back in return. That is, from ting perspective, the company is constantly creating receivables and ainst receivables. And when books are printed with flaws, there will be books such that a customer has a claim against the company. The customer will re we will regard himself as not obliged to pay the full amount of the original invoice. The accounts receivable clerk (who, at Premiere Printers, is a CPA) will therefore be constantly adding receivables and crediting receivables, without knowing exactly how many are valid, and to what extent, at any time. Thus, an important job for the internal auditor of such a company will be to insure that the accounts receivable clerk is accounting for these appropriately. When William McGee is doing his review of accounts receivable at Premiere, he discovers many instances, in large accounts, in which a customer alleges a claim against the company for flawed book production and therefore pays less than the original invoice. (For instance, the customer is billed $50,000 but pays only $45,000, regarding this as in complete satisfaction of the original invoice.) But this lesser payment has been accounted for, not by crediting it against the original invoice, thus revealing a shortfall, but rather by crediting it against the carried over receivable from a prior impaired transaction, thus hiding potential write-offs. McGee sees that this has been going on for some time and that the receivable balance has become less and less collectible. When McGee investigates further, he discovers that the accounts receivable department is understaffed and for some time has lacked the resources to determine the extent and validity of customer's claims. Moreover, he learns that ru, in light of this, has instructed accounts receivable to regard all invoices as tible and to apply current payments to carried-over balances. The CFO has down this policy in part because he is hard-nosed and dismissive of customers' ins, thinking that they lack basis, and in part because the policy leads to a porting of strong profits for the company, for which the CFO has already received several large bonuses. the policy is misguided and he CFO in reply says to McGee approaches the CFO and tells him that the policy is misguid. should be changed. You can't do that", McGee insists. The CFO in re McGee: "Oh can't I? Tell me, McGee, who authorizes your paycheck?" Question What should McGee do? In this company, the CFO is his boss. Should he do the CFO tells him, or should he do something else? Which of the following coure of action is permissible for McGee, and, of those which are permissible, how would you rank order them? Looking for an Answer A. McGee should do what the CFO instructs. After all, the CFO knows better, since he has responsibility for the finances of the company as a whole. Also, he has both the authority and the responsibility for this decision. McGee should let it play out; time will tell whether the CFO's policy is a good one. B. McGee should go directly to the president and say something like the following: "The company has a major problem here, which is being covered up. We've lost control of the receivable balance. The loss we will have to sustain, which will entirely unsuspected, could be catastrophic foule