The following set of scenarios is adapted from "Test Your Ethical Judgment" by Kay Zekany, Strategic Finance November 1, 2007 and from the Institute of Management Accountants. Each of the scenarios is based on facts in the World Com fraud.
Required
For each scenario, decide which option (a) through (e) is most appropriate and state your rationale.
a. The facts indicate good business practices.
b. The facts indicate a scenario that is perfectly ethical but that does raise a "red flag" in terms of fraud risk.
c. The facts indicate a situation that is improper, but not fraudulent.
d. The facts indicate a situation that is improper and that raises a "red flag" in terms of fraud risk.
e. The facts indicate that fraud is present.
Scenarios
1. There was intense pressure to keep the corporation's stock from declining further. This pressure came from investors, analysts, and the CEO, whose financial well-being was significantly dependent on the corporation's stock price.
2. A group of employees is compensated well in excess of the guidelines of the company's approved salary and bonus schedules allowable for their positions. However, the overall company pay schedule is appropriate and up-to-date and represents current market conditions.
3. The company closely guards internal financial information, to the extent that even some employees on a "need-to-know basis" are denied full access.
4. Managing specific financial ratios is very important to the company, and both management and analysts are keenly observant of variability in key ratios. Key ratios for the company changed very little even though the ratios for the overall industry were quite volatile during the time period.
5. The internal audit department interacts with the audit committee and board of directors primarily in terms of describing plans for upcoming projects and details on completed projects that emphasize operational effectiveness. However, internal audit primarily interacts throughout the year with the CFO. The CFO directs ongoing activities and is responsible for financial rewards provided to the internal audit department leadership and staff.
6. The CEO gives the internal audit department an operational audit task that has no substantive accounting purpose. The task is extremely time-consuming and diverts departmental resources away from normal activities.
7. In an effort to reduce certain accrued expenses to meet budget targets, the CFO directs the general accounting department to reallocate a division's expenses by a significant amount. The general accounting department refuses to acquiesce to the request, but the journal entry is made through the corporate office.
8. In an attempt to reduce operating expenses, the company capitalizes expenses to an asset account.
9. An accountant in the general accounting department is uncomfortable with the journal entries required to reallocate divisional expenses. He brings his concerns to the CFO, who assures him that everything will be fine and that the entries are necessary. The accountant considers resigning, but he does not have another job lined up and is worried about supporting his family. Still, he never voices his concerns to either the internal or external auditors.
10. The controller of the company was also uncomfortable with the reallocation entries but also does nothing to stop them. In fact, he encourages the questionable accounting entries.
11. Accounting records were either nonexistent or in a state of such disorganization that significant effort was required to locate or compile them.