Francis Maloney, the engagement partner on the audit of a large hotel in a major city. Has just received a report from Sally Stone, the senior working on the audit. The report causes Francis to ponder how he should handle something that Sally has discovered in regard to political contributions. From what Sally says, it's clear that the amounts involved are material.

Sally realized from her analysis of the contributions account that the client's management had seen fit to make financial contributions, as permitted by law, to several candidates for influential political offices. In fact, to three individuals, the hotel has made the maximum total contribution that a candidate is allowed to accept under the law.

 

In auditing the food­service revenues from banquets. Sally discovered that a number of sales invoices have been canceled. In following up on these canceled invoices, she found that there was a commonality among them; all were for func­tions held for political candidates. By cross-checking the canceled invoices with the contributions account. Sally recognized that the same three candidates who received the maximum financial contributions were the primary beneficiaries of the canceled invoices. Rather than billing the candidates' campaign managers, the hotel employees had been instructed by the V.P. for Marketing to cancel the invoices and charge off the amounts as uncollectible. The law specifies fines, or even jail terms, for candidates who accept contributions beyond the specified limit; donors in such cases may also be fined.

 

Sally was aware that the local newspaper was doing an investigative story on campaign contributions. When she queried the chief financial officer of the hotel, Sally was told that the in­kind amounts were small in terms of overall earnings. "Besides," the controller said, "we have learned that maintaining contact with the right people brings in business and provides a 'friendly ear' on issues that may impact our business. So we do some promotional things that don't involve financial donations."

What are the ethical issues?

What should Sally do?