F1 222 ACCT – 05- Fraud in Financial Reporting Systems

| June 13, 2018

Please read the attached case, and answer the question below thanks!Make sure to use three academic resources, and Harvard in-text citation (500-700 words)”In the case of “Don’t Play Games”, what are the ethical issues raised by the current situation? What are the alternatives for action that the Controller and CEO could take, and which one would you choose? Refer to the AFP Code of Ethics as a source for analyzing these issues. Be sure to consider the position of all stakeholders that are materially affected when formulating your answer.”MINICASE: ACCT – 05BUSINESS ETHICS PROGRAMDon’t Play Games!Topic:Fraud in Financial Reporting SystemsCharacters: Russ, PresidentMonica, Vice President-Small Business Loans at local bankRick, ControllerRick was hired as Controller to help sort out and organize the records of a $7 million dollarmedical supply firm. This company was recently extended a $1,000,000 small business loanto acquire the assets of a competitor that was going out of business. In Rick’s view, theacquisition was a financial mess. Inventory records were misplaced or inaccurate, and no onecould figure out the accounts receivable, most of which were over 45 days past due.Although salesman from the acquired firm were retained, a sales decline in the industry andpoor management of the new firm led to attrition of the best and brightest individuals.Because of the sales decline, the bank was pressing to know more about the consolidatedentity’s current financial situation. Monica, the bank Vice President in charge of the loan,and her staff of bank auditors were in daily contact with Rick. Each morning, Rick was a bitnervous about that days’ cash draw since the firm really played the float. Moreover, Russ,the President, would often hold large vendor checks in his desk drawer without telling Rick.Although the financial resources were strained at best (the firm had trouble reimbursingpetty cash), there was a sense of optimism within the organization. As the companypenetrated the nursing home industry, it was pulling in enormous profits from Medicare dueto markups at eight times its costs. As a result of these sales, the firm would start earning asmall profit in the fourth quarter. Even at the end of the year, however, Russ did not want tomention these sales figures to the bank or accrue the revenue and accounts receivable untilthe checks arrived, because he was unsure when the government would be paying for thegoods, and more importantly, because he wanted to have something in his back pocket incase the bank wanted to foreclose. Furthermore, Russ, as the majority stockholder in thefirm, was concerned he would lose the firm if bankruptcy proceedings should start.After a few months of recording sales on a cash basis, Rick started slipping hints to the bankthat the company’s financial status was better than was reported. Still, it was not hiscompany, and he needed to keep his job. He knew that Russ would “play games” with otherpeople, but he would not appreciate other people’s “playing games with him.” Moreover,Russ did not trust new employees, and Rick knew he would have to “earn” the President’strust.G. Stevenson Smith, Ph.D., CPA, CMA, Professor of Accounting, West VirginiaUniversityCo-author: Curtis Jay Bonk, Ph.D., CPA, Assistant Professor of Educational Psychology,West Virginia UniversityAuthor:1992 Arthur Andersen & Co, SC. All rights reserved.Page 1 of 1

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