DAVID F. BEAN and JILL M.

DAQUILA

ACCOUNTING STUDENTS AS SURROGATES FOR ACCOUNTING

PROFESSIONALS WHEN STUDYING ETHICAL DILEMMAS:
A CAUTIONARY NOTE

ABSTRACT. A challenge in performing empirical research is determining appropriate

research subjects. Laboratory experiments are noted for their use of student subjects. The
issue of interest in this research is whether student subjects respond to a contextual ethical
dilemma in the same manner as working professionals.
An experiment was conducted with 110 students and 169 experienced accounting
practitioners, who are CPAs, utilizing six different financial reporting dilemmas. Students
were assigned to three different organizational categories in terms of tone at the top
ethical, not ethical and neutral. Experienced accounting practitioners provided information about the perceived tone at the top in their own organizations using a questionnaire.
The t-tests disclose significant differences between CPAs and students for each of the six
dilemmas at the p < 0.001 level.
KEY WORDS: accountant, ethical dilemma, financial reporting, fraud, internal control,
students, tone at the top

INTRODUCTION
Integrity in financial reporting is crucial to the efficiency and effectiveness
of capital markets and the administration of tax laws. The considerable
expenditures made to enhance internal control systems, which are fundamental to the reliability of financial reporting, is an ongoing testament to
the importance placed on the prevention of fraudulent financial reporting.
The Committee of Sponsoring Organizations of the Treadway Commission
(COSO) (1992, p. 19) states that the effectiveness of internal controls
cannot rise above the integrity and ethical values of the people who create,
administer, and monitor them. Integrity and ethical values are essential
elements of the control environment, affecting the design, administration
and monitoring of other internal control components. In the view of
COSO the tone set by senior management is the most important factor
contributing to the integrity of the financial reporting process.
The existing literature (see DAquila (1998) and DAquila and Bean
(2000) for a more comprehensive discussion of the literature) suggests that
the creation of an ethical climate may deter fraudulent financial reporting,
Teaching Business Ethics 7: 187204, 2003.
2003 Kluwer Academic Publishers. Printed in the Netherlands.

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DAVID F. BEAN AND JILL M. DAQUILA

as well as other types of fraudulent behavior. The literature indicates that

an appropriate tone at the top is a fundamental factor in fostering ethical
behavior by organizational members. Management sets this tone through
example (i.e. through words and deeds). However, despite the well-known
belief about the importance of an appropriate ethical climate, accountants
do perceive pressure on the job (DAquila, 1998; Rich et al., 1990).
Given the importance of reliable financial reporting, as well as the widespread beliefs about the tone at the top, it is somewhat discouraging to
note the lack of empirical research on these issues. Empirical research is
further clouded by the determination of appropriate research subjects. Are
the dimensions of the research question such that experienced professional
subjects are needed or will student subjects suffice and act as surrogates for
professionals? Experienced professionals are exposed to ethical behavior
issues while interacting with fellow practitioners, as well as through their
training and their involvement with professional associations. Students
exposures to ethical dilemmas are often perfunctory or non-existent.
Laboratory experiments are prevalent in the empirical studies of ethics
theory and issues. Kerlinger (1986, p. 367) defines a laboratory experiment
as a research study in which the variance of all or nearly all of the possible
influential independent variables not pertinent to the immediate problem
of the investigation is kept at a minimum. To ensure external validity of
laboratory experiments, the context and research variables should reflect
a realworld setting that is of interest to both practitioners and researchers
(Winer, 1999; Wells, 1993; Ferber, 1977). Behavior that may otherwise be
difficult to observe can be gauged through such real life decision scenarios
(Brief et al., 1996). Generalizability beyond the laboratory setting is an
important component of such research. External validity deals with the
issues of generalizability of the results found to other populations, settings
and so forth (Campbell and Stanley, 1963). Laboratory research should be
evaluated according to the extent that it increases our understanding of the
processes in work behavior (Dobbins et al., 1988).
At the present time, field studies appear to be popular. We find disconcerting Dipboyes (1990) observation that field studies are more than twice
as likely as laboratory studies to be published in journals and that only
4% of field studies use college student subjects. We concur with Lynchs
(1999, p. 371) observation that . . . there is no reason to suspect that results
from any single field setting are any more or less generalizable than those
from any single laboratory setting.

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STUDENTS AS SUBJECTS
Laboratory experiments are noted for their use of student subjects.
Convenience and cost are certainly two major explanations for this situation. Students are typically readily available to the researcher at a time
and location that is highly convenient to the researcher and at a cost that
is often zero or negligible. Real world subjects (e.g. managers, consumers,
etc.) are difficult to locate, costly to acquire, and are often available only
in settings and times that do not necessarily coincide with the planning
schedule of the researcher.
Wells (1993) notes that findings based on students are always suspect
but not always wrong, while Lynch (1999) asks why a single homogeneous
group of church members, office clerks, etc. would be any better. A
primary criticism of student subjects is that they are not experienced in
the experimental task. Many experimental tasks, however, do not require
experience and some focus on the contribution, and lack thereof, of experience. Sears (1986) documented a wide range of psychological characteristics that are unique to late adolescence and early adulthood. Additionally,
college students also differ from other people their age. Weick (1967)
suggests using tasks where age and experience are not moderator variables.
The literature on students as surrogates for organizational members is
mixed and difficult to sort out due to differing experimental conditions,
variables, etc. Locke (1986) finds that both college students and employees
respond similarly to goals, feedback, incentives, participation, etc. and that
similarities among these subjects are more crucial than their differences.
Gordon et al. (1986) assert that students are often not appropriate surrogates for managers. There is some evidence in the literature that graduate
business students are better surrogates for managers than undergraduate
students (Fleming, 1969; Gordon et al., 1986; Hemmasi, 1989).

RESEARCH STUDY OBJECTIVE

The issue of interest in this research is whether student subjects respond to
contextual ethical dilemmas in the same manner as working professionals.
There is an assumed awareness of the importance of the tone at the top
and the importance of ethical financial reporting on the part of both experienced practitioners and student subjects that are accounting majors. On
an intellectual level both experienced practitioners and accounting majors
are familiar with the technical dimensions of proper financial reporting,
as defined by professional accounting organizations such as the American
Institute of Certified Public Accountants and the Institute of Management

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Accountants. However, awareness does not necessarily imply importance.

One can read Robinson Crusoe and be intellectually capable of knowing
what to do when finding oneself alone on a deserted island, but this is
a far cry from the awareness of one who has actually lived through the
experience.

METHODOLOGY AND SUBJECTS

A two-part experiment was conducted with accounting students and practitioners. An instrument was administered to both groups to determine
if there was a significant difference in responses on financial reporting
dilemmas.
Part I
Student subjects consisted of 110 junior and senior accounting students at
three eastern U.S. colleges. One of the three versions of the experimental
instrument (Appendix A) was randomly distributed to each subject.1
Students returned completed instruments in sealed envelopes to their
instructor to maintain anonymity.
The instrument describes three different versions of a tone at the top of
an organization where a fictitious employee worked. The tone at the top
of the organization is described as follows (1) fostering ethical behavior,
(2) not fostering ethical behavior, and (3) neutral with respect to ethical
behavior:
1. The organization is profit oriented and sets high objectives for its
members. Upper management expects that its employees will adhere
to high ethical standards to meet these agreed upon objectives. Since
the company believes that the tone of the organization starts with the
top, managers try to set good examples through their own behavior.
Recently the company incurred significant costs to rectify a potential problem relating to a defective product, even though they did not
believe they were legally required to do so. Each year, the company
requires all employees to attend training workshops, which offer
1 Responses are not evenly distributed among the three versions of the instrument since

juniors and seniors represent a subset of a larger initial sample that had been asked to
complete the instrument. We had decided to use the responses from only juniors and seniors
for the following reasons: (1) to include in the sample only those students who have a
sufficient understanding of accounting concepts based on courses completed and (2) to
maintain consistency across the three colleges (e.g., course offerings at the three colleges
differ prior to junior year).

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191

employees an opportunity to discuss ethical dilemmas and possible

courses of action.
2. The organization is profit oriented and sets high objectives for
its members. Upper management expects that its employees will
use any measure to meet these agreed upon objectives. On occasion, employees have witnessed management bending some rules
to accomplish a business goal. There have also been times when
employees believed management also expected them to bend some
rules to accomplish business goals. Recently, the company developed
a product with a potential defect and did not rectify the problem
because of cost considerations. If employees ever encountered
unethical behavior, they are not exactly sure where they would turn
for help.
3. The organization is profit oriented and sets high objectives for its
members. Upper management expects that its employees will meet
these agreed upon objectives. Each year, the company requires all
employees to attend training workshops on various work-related
issues.
The remainder of the instrument is identical for all three versions.
The experimental instrument describes six separate accounting dilemmas,
constructed from actual Security and Exchange Commission cases that
address fraudulent reporting issues, in addition to a business dilemma to
disguise the intent of the research. The questions vary by type of financial reporting. Each scenario provides an employee with a motive (e.g.
bonus) to misrepresent the organizations financial statements. Subjects
were requested to circle one of five answers that best describe what an
employee in that organization would do in the given situation. The forced
choices range from misrepresenting the organizations financial statements
by a significant degree to not misrepresenting the organizations financial
statements. For each dilemma choice there is only one ethical response.
The four remaining choices are financial misrepresentations (unethical
choices) with decreasing degrees of misrepresentation. A motive and
minimal risk of detection are incorporated in each case, since these are
believed to be necessary to influence fraudulent financial reporting. Mean
scores were computed and a higher (lower) score reflects a more ethical
(unethical) decision. The accounting dilemmas were based on a questionnaire developed by Brief, et al. (1996), who reported that three partners in
a Big 6 public accounting firm had reviewed their instrument, and that the
instrument had been pilot tested with MBA students.

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Part II
The experienced practitioners consisted of 169 CPAs who perform financial reporting in private industries and were selected from an AICPA
membership roster. Each practitioner completed an anonymous questionnaire that solicited responses to the six accounting dilemmas and the one
additional dilemma to disguise the intent of the research. In addition, these
experienced accounting practitioners provided information about the tone
at the top of their own organizations. Information about the perceived tone
at the top was obtained using 19 questions from a more comprehensive
instrument developed by DAquila (1998). For each question, subjects
were asked to circle one of five rank ordered answer choices. The instrument had been pilot tested with a sample of 150 CPAs. A factor analysis of
the results indicated that one factor (i.e., tone at the top) correlates highly
with the questions asked. Cronbachs alpha coefficient for these questions
is 0.95.
Thus, the experimental difference is that experienced practitioners indicated their perceived tone at the top in their own organizations while
students were randomly assigned to one of three tones at the top. In
addition, practitioners were requested to return a postcard separately from
the completed questionnaire to identify responses and maintain anonymity.

ANALYSIS AND RESULTS

Prior to comparing results obtained from accounting students and practitioners, we conducted separate t-tests for practicing accountants and for
students and determined that gender had no significant effect on responses
to the financial reporting dilemmas.2 We also conducted an analysis of
variance using responses from the students and determined that there were
no significant differences in responses across the three colleges.
Responses of the accounting practitioners relative to tone at the top
were classified into three groups based on their relative scoring. For
instance, given a range of possible scores from 1995 (based on 19 questions, each with a likert scale from one to five), practitioners who scored
within the top third (i.e., between 70 and 95 points) were classified as being
2 Prior researchers have obtained mixed results when examining the relationship

between gender and ethical behavior. For instance, Kelley et al. (1990) revealed that
females report their behavior as being more ethical, whereas Touche Ross (1988) found that
males gave themselves higher ratings for ethical behavior. However, others have found that
gender has no significant effect on tolerance to fraud (Harris, 1990) or the compromising
of personal principles for the sake of the organization (Posner and Schmidt, 1987).

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TABLE I
Ethical dilemmas and tone at the top by students and practitioners (classified by
relative score)

Dilemma

CPA
(N = 105)

Positive
Student
(N = 23)

CPA
(N = 60)

Neutral
Student
(N = 41)

Creative
Polansky
Joses
Nutron
Daytona
DMC

4.24
4.60
4.51
4.89
4.78
4.69

2.96
3.39
3.09
3.65
3.87
3.52

5.04
6.01
6.06
4.44
3.29
4.44

3.97
4.48
4.23
4.76
4.63
4.37

2.93
3.98
3.10
3.90
3.88
3.63

3.82
2.58
3.73
3.77
3.36
3.47

***p < 0.001.

exposed to a positive tone at the top that fosters ethical behavior. However,
only 4 experienced practitioners indicated a negative tone at the top for
their organization. Thus, a meaningful comparison with students at this
level cannot be performed. Therefore, to perform meaningful comparisons
between students and experienced accounting practitioners, a t-test was
performed based on mean scores for each of the six dilemmas for only the
Positive and Neutral tone at the top categories. As reported in Table I, the
t test indicates significant differences at the p < 0.001 level for each of the
six accounting dilemmas.
Given the relatively minor incidences of negative tone at the top for
experienced practitioners, the responses were also classified into three
equal groups based on their relative scoring for the tone at the top. A
comparison of this grouping with students is reported in Table II. This
grouping also indicates a significant difference at the p < 0.001 level
for each of the six accounting dilemmas. Furthermore, the scores of
experienced practitioners are higher (i.e., more ethical) than the scores of
students for every accounting dilemma.

DISCUSSION
The purpose of this research is to provide empirical evidence on the
use of accounting students as surrogates for accounting professionals in
laboratory experiments. An analysis of the results indicates a significant
difference at the p < 0.001 level between experienced practitioners and

4.36
4.68
4.54
5.00
4.84
4.81

Creative
Polansky
Joses
Nutron
Daytona
DMC
***p < 0.001.

CPA
(N = 58)

Dilemma

2.96
3.39
3.09
3.65
3.87
3.52

Positive
Student
(N = 23)
5.22
5.71
5.62
4.97
3.46
4.86

3.97
4.50
4.46
4.78
4.72
4.47

CPA
(N = 58)
2.93
3.98
3.10
3.90
3.88
3.63

Neutral
Student
(N = 41)
4.01
2.65
4.73
3.83
4.01
3.90

3.98
4.35
4.13
4.58
4.56
4.33

CPA
(N = 54)

3.30
3.57
2.59
3.76
4.06
3.94

Negative
Student
(N = 46)

Ethical dilemmas and tone at the top by students and practitioners (classified by equal groups)

TABLE II

2.64
3.36
5.61
3.03
2.24
1.76

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195

student subjects. It appears unlikely that the difference is associated with

technical ability. Both sets of subjects, experienced accounting professionals and accounting students, are familiar with the technical financial
reporting requirements for each of the accounting dilemmas.
The authors suggest that the difference is due to the perceived
importance/prominence of the accounting dilemmas. Baack et al. (2000)
describe ethical issues in terms of depth. Some items are superficial or
peripheral, while others are more intimate. They suggest that the intimate
and, therefore, most meaningful moral challenges impact behavior. The
authors believe that the students in this study viewed the ethical issues as
more superficial than the practicing accountants. Experienced accountants
recognize ethical reporting as a powerful moderator in their professional lives. Many have found themselves personally embroiled in ethical
reporting dilemmas and many have personal knowledge of other professionals who have undergone what is often referred to as a test of fire.
Thus for accounting professionals the experimental dilemmas are powerful
and real. They have a life that has been experienced either directly or
indirectly. Students, however, are intellectually aware of the ethical dimensions of the accounting dilemmas, but emotionally distant from them.
They are aloof from the powerful forces that are present in these ethical
dilemmas.
The authors are proponents of using students as surrogates for others in
experiments when appropriate. The issues of generalizability and external
validity can be addressed in the methodology of researchers. These issues
are usually addressed in the design of the task and the suitability of the
task to the subject. We suggest that an additional concern is the perceived
importance of the task to the subjects, which is particularly necessary in
empirical work in ethics.

APPENDIX A
Decision Making Questionnaire
This section consists of 7 different questions, each of which requires you to make
a decision about what action you believe the employee would take. Most of
the questions are based on actual incidents and are designed to capture how individuals make managerial decisions. Your answers are completely confidential.
Do not put your name on the answer sheet.
Read each question in the enclosed packet carefully. Then, select one of the
decision alternatives that will be provided to you below. Move through the questions as quickly as possible. But, be sure each decision you make reflects what
you believe the employee would actually decide given the situation described

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DAVID F. BEAN AND JILL M. DAQUILA

in the question. That is, each of your decisions should not be based on how you
hope the employee would behave, but must indicate how you think the employee
really would act.
Remember: (a) read each question very carefully, (b) select the most realistic
decision alternative in responding to each question; and (c) move through the
questions as quickly as possible.

Description of the Organization Where Each Employee Works

The organization is profit oriented and sets high objectives for its members.
Upper management expects that its employees will adhere to high ethical
standards to meet these agreed upon objectives. Since the company believes
that the tone of the organization starts with the top, managers try to set good
examples through their own behavior. Recently, the company incurred significant
costs to rectify a potential problem relating to a defective product, even though
they did not believe they were legally obligated to do so. Each year, the company
requires all employees to attend training workshops, which offer employees an
opportunity to discuss ethical dilemmas and possible courses of action.
INSTRUCTIONS: CIRCLE THE NUMBER OF THE ONE ANSWER BELOW
WHICH YOU BELIEVE THE EMPLOYEE WOULD TAKE.

Case 1: Creative Creatures, Inc. SHOULD SID . . .

1.
2.
3.
4.
5.

Do nothing and hope the test market specialists are wrong.

Go to the CEO and tell him at least a 4% return reserve is needed.
Go to the CEO and tell him at least a 6% return reserve is needed.
Go to the CEO and tell him at least a 8% return reserve is needed.
Go to the CEO and tell him a 10% return reserve is needed.

Case 2: First National Bank Corporation WHAT SHOULD HE DO?

1. Strictly adhere to the cost containment guidelines and not let anyone go to the
workshops.
2. Only let the managers send the two most senior people on their staffs.
3. Only let the managers send the two top performers on their staff.
4. Ask the managers to choose one woman and one minority member.
5. Forego the guidelines and do not restrict attendance at the workshop.

Case 3: Polansky Manufacturing WHAT SHOULD WALLY DO?

1.
2.
3.
4.
5.

Include the entire cost of the plane in the contract.

Include 75% of the cost of the plane in the contract.
Include 50% of the cost of the plane in the contract.
Include 25% of the cost of the plane in the contract.
Not include any of the costs of the plane in the contract.

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Case 4: Joses, Inc. HOW MUCH OF THE VALUE OF JOSES

INACTIVE UNITS SHOULD TODD WRITE OFF THIS YEAR?
1.
2.
3.
4.
5.

Nothing, he should not take a write-off on the inactive units this year.
Less than $1 million
$1 to 2 million
$2 to 3 million
The entire $3.1 million should be written off.

Case 5: Nutron, Inc. HOW MANY DAYS DO YOU THINK NEAL

SHOULD WAIT BEFORE HAVING THE ORDER SHIPPED?
1.
2.
3.
4.
5.

None, he should ship the order immediately

24 days
57 days
810 days
He should not ship the order until after the deal is closed and a contract is
signed.

Case 6: Daytona Auto Parts Corporation PAT SHOULD . . .

1. Not sign the inventory report. Rather she should submit a report regarding her
concerns to her boss, Mr. Brown.
2. Sign off in the inventory report but also speak to Mr. Norman, the Regional
Manager, about her concerns.
3. Sign off in the inventory report and then talk with her boss regarding her
concerns.
4. Sign off in the inventory report and document her concerns in an internal
memorandum for the file.
5. Sign the inventory report and do and say nothing else.

Case 7: DMC Corp. HOW SHOULD ED HANDLE THE SITUATION?

1. Disregard the tip as farfetched.
2. Send a formal letter to the Controller thanking him for putting in the tight
internal controls and reminding him of the importance of these procedures.
3. Ask the RFO to send him a formal confirmation that the Regions internal
control procedures are sound.
4. Wait a few weeks after returning to Corporate Headquarters and send the
President a note about the anonymous letter, indicating its just too farfetched
to believe.
5. Immediately inform the President of the letter and proceed to ask specific
questions to investigate all of the allegations in the letter.

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Decision Making Questions

Case 1: Creative Creatures, Inc.
Sid just returned from a meeting with the Controller. The meeting not only ruined
his day, but possibly his newfound status as a boy wonder at Creative Creatures,
Inc. As Vice President of Product Development, Sid manages the group that has
been working on a new line of Crazy Creatures toys which is due out in time for
the Christmas season. However, early test market results showed that one out of
ten Crazies could be returned because of malfunction. And, there is just no way
to correct the problem before the toys are to be shipped for the Christmas season.
So, Sid has to get the Controller to increase the return reserves from 2% to 10%
for this particular line, or the company will be overstating profits on its sales. That
is, conventional accounting practices dictate that return reserves represent a cost
of doing business and must be subtracted from revenues in estimating profits in a
given accounting period.
Creative Creatures believes in quality first. Because they pride themselves on
such high quality, theyve had very few returns in the past and, correspondingly,
allocate only a small amount to cover potential returns. When Sid approached the
Controller with his problem, the Controller refused to deviate from the minimal
return reserve policy. Sid knows that if returns are as high as he suspects they
will be, sales will be seriously overstated. He knows that he should discuss the
problem with the CEO. However, the CEO has invited Sid and his wife to join
them for a trade show in London. (Sids never been to Europe before and fears
that if he reports the problem to the CEO he can kiss the trip goodby. Indeed, he
thinks hell be lucky if thats all the CEO does to him.)
He also believes that test market specialists are sometimes overly cautious in
their projections. So, a one out of ten return rate simply may not materialize. Sid
doesnt know what to do.

Case 2: First National Bank Corporation

John Kramer is facing a really sticky dilemma. John is the Vice President of the
Merchant Credit Card Department at a large Midwestern bank, First National
Bank Corporation. His department recently added several large accounts which
helped to far exceed their performance objectives for the first three quarters.
Moreover, John expects the fourth quarter to be equally successful. First National
Bank Corporation as a whole, however, is not having such a good year. In fact,
fourth quarter projections for the Corporation indicate current profits to be below
last year. As a result, the Corporation has frozen non-executive salaries, put a
moratorium on hiring, and is scrutinizing all employee expenses for travel and
entertainment.
John was made aware of his current dilemma by his Administrative Assistant
who monitors the Departments budget. According to Sam, the Assistant, not only
has the Department failed to adhere to the Corporations new and rather conservative travel and entertainment policies for the third quarter, but projections for the
fourth quarter indicate travel and entertainment expenses will be 30% over budget.

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199

A major reason for this rather large fourth quarter expenditure is that several of
Johns managers authorized more than a dozen of the Departments staff to attend
an American Banking Society workshop in Honolulu. Usually such expenditures
wouldnt bother John, especially when his Department is having such a good year.
But, the Corporation is in trouble.
John knows that if he wants to be perceived by his boss as a good team player,
hell have to cancel most of his folks trips to Hawaii. He also knows, however,
how hard the staff in his Department has worked this year. The recently added
new business, coupled with the Corporations hiring freeze, has created many 60
hour work weeks for the staff members. Moreover, they probably would make
some valuable contacts at the workshop in Hawaii. John knows, nevertheless, that
his reputation as a good administrator and team player would be jeopardized if he
lets expenses get too far out of line and that could hurt his year-end bonus. While
his Departments strong performance should justify a good bonus, not towing the
line on cost-containment would raise questions with the President.
One possible compromise is to restrict the number of staff members going to
the workshop. The dilemma, then, is determining the criteria by which some staff
members will be selected to go to Hawaii. He could ask his managers to send
only the two most senior people on their staffs to the workshop. Unfortunately,
this would exclude any women or minorities from going. Alternatively, he could
let his managers send only the top two performers on their staffs; but again, this
would exclude women and minorities and they could probably benefit the most
from the experience.

Case 3: Polansky Manufacturing

Wally Polansky, CEO of Polansky Manufacturing, really wants a company plane.
He finds it an irritation and often time consuming to rely on public air transportation. Some of his plants across the country cant be reached by commercial
airlines, so that means driving several hours when he wants to inspect some plants.
Ever since Wally started out with just one plant, hes been the kind of owner who
wants his presence to be known, thus, he frequently visits his plants.
Polansky Manufacturing is negotiating a new contract with the Department of
Defense (DOD) to produce machine parts. Wally knows that, in a strict sense, the
cost of the plane probably shouldnt go into the contracts overhead. Nevertheless, he still figures he may be able to justify charging the DOD something. The
contract calls for parts that will be manufactured at more than one of his plants. A
plane would allow him to visit all of these plants, thus ensuring that the production
schedule and contract specifications are met. Wally wonders how much of the cost
of the plane he can include in the overhead costs of the contract.

Case 4: Joses, Inc.

Todd knows that very soon now he or one of JOSES two Executive Vice Presidents will be named President by the Boards Personnel Committee. He also
knows the race is darned close. He and the two EVPs have been with the restaurant

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chain since it consisted of only five or six units. JOSES currently is comprised of
more than 135 units, plus a rapidly growing frozen food business.
Todd has a great deal of responsibility. As the firms Chief Financial Officer,
he is responsible for finding the capital to maintain JOSES planned expansion.
In addition, the firms Controller, Legal Counsel, and Vice Presidents of Human
Resources, Information Systems, and Real Estate report to him. Its a rare week
when Todd works less than 60 hours.
Todd has just learned of a potential bookkeeping mistake from someone
on the Controllers staff that he is afraid may cost him the Presidents job. As
the firm expanded over the years, a few units, due to shifting market conditions,
had to be closed down. The value at which these inactive units are carried on the
firms books is based upon the market price of the units at the time each unit was
closed ($5.1 million for the land, building, and equipment). However, the value
of all units has dropped drastically since they have been closed because of (a)
decreasing land prices in the neighborhoods the units are located, (b) vandalism,
including two units completely destroyed by arson, and (c) inadequate maintenance of equipment. The true value of the inactive units probably is less than $2.0
million.
It is now the end of December. Since JOSES year end statements are being
prepared, Todd needs to decide if he should authorize a write-off of the firms
assets at this time to reflect the drop in the value of the inactive units. Such a
write-off would cut deeply into JOSES profits for the year. Therefore, the firm
would be less attractive to those from whom Todd solicits the capital funds needed
for expansion. In addition, Todd also knows that a sizable write-off right now
would kill his chances for promotion. The announcement of who will assume the
Presidents position is scheduled for the first of the year.

Case 5: Nutron, Inc.

Neal is anxious, very anxious. As Chief Operating Officer of Nutron, Inc., which
manufactures a line of quality AM/FM receivers, much of his income is in the
form of a bonus tied to annual earnings. Neal and his brother have a large real
estate loan coming due and hes counting on a particularly large bonus this year.
But, only 11 days remain in the fourth quarter and revenues are below those
needed to boost earnings up to the level Neal had expected. If something positive
doesnt happen real soon, he and his family will be facing a crisis.
Neals only hope is Sound Systems, a large Dallas based retailer. Sound
Systems is very close to placing an order for receivers that will generate more
than enough revenues to keep Neal out of trouble. Neal is almost certain they will
close the deal in a week or two. He has decided to wait a few more days; and, if
Sound Systems is still holding out, he may ship them the goods anyhow. This way,
revenues will be recorded by years end and Sound Systems will be delighted to
get their receivers earlier than expected.

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201

Case 6: Daytona Auto Parts Corporation

Until today Patricia Lewis has been unbelievably enthusiastic about her new job
as Senior Internal Auditor for Daytona Auto Parts Corporation. She is proud to be
one of the firms few women supervisors and the very first female auditor to be
hired into the Corporate Auditing Group. One of her first assignments has been
to review the year end inventory procedures followed by the outlets located in the
Southwest Region. This is an important, but potentially tricky assignment. Not
only does this Region have the most outlet stores; but Mr. Norman, the Regions
Manager, is an old golf buddy of her boss, Mr. Brown, Vice President of Internal
Auditing. Mr. Norman, whose nickname is Stormin Norman, has a reputation
for being quite an arrogant so-and-so. Patricias task was to review the inventory
procedures and certify that they were sound. She knew that if anything went
wrong, Mr. Norman would be on the phone with her boss immediately and would
make her life very miserable.
After spending almost a week in the Southwest Region reviewing the
inventory procedures that were used, Patricia Lewis was scared. The procedures
that the Regional Office follow include counting inventory at different locations
on different days of the week. Believing that this was not appropriate, Patricia
recommended to Mr. Norman that the inventory procedures should be modified.
Mr. Norman justified the present practice to Patricia by arguing that the approach
was required because of the need to leave some stores open to serve customers.
That is, he didnt want to close all of the stores at the same time just to take
inventory. Also, he said it was impossible to get enough qualified help to count
inventory in all the stores on the same day.
Now Patricia wishes she had taken a stronger stand. As soon as the inventory
count began her suspicions grew. In the stores she had visited during the inventory,
Patricia saw a substantial number of parts just inside the store rooms. The crates
did not have any shipping information details attached to them. It was unclear as
to the date these parts arrived or how long they had been in the stores. It was an
unusual practice not to have the details on the crates. Pat suspects that because
this information is missing, inventory was moved from store to store to inflate the
amount at each outlet.
As the first woman in her job, Patricia desperately wants to succeed. But, shes
afraid if she rocks the boat she may get fired. Since her boss and Mr. Norman are
such good pals, shes almost certain that if she brings the inventory problem up
with Mr. Brown, he will just go along with Mr. Norman and approve the inventory
procedures. Should she rock the boat and say something or just sign-off on the
procedures and inventory totals?

Case 7: DMC Corp.

Ed Dantene should be happy. His temporary assignment as Regional Director of
the DMC Midwest Office will soon be over. Ed has worked eight years for DMC
Corp., a Philadelphia based firm primarily engaged in employee benefits services
and investment management. He considered it an honor and a great experience
for someone of his age to be asked by the President to temporarily replace Mr.

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Zucco, the Midwest Regional Director, while he recuperated from back surgery.
The assignment has been challenging, but, the commuting back and forth to Philadelphia from Indiana on the weekends has been tough on Ed, his wife, and their
three kids. So, Ed is especially excited to return home and looking forward to a
new position that awaits him in the Corporate Offices.
The Vice President of Operations, the Regional Financial Officer, the
Controller, and the Personnel Director report to Ed in his position as Acting
Regional Director. Its a good Regional Office that has consistently reported
an annual return on its investments in excess of 10% and has never had one
unprofitable month.
Although Ed should be happy, he presently is facing a dilemma. Last week, Ed
received an anonymous letter informing him that some of the Regions investment
and accounting practices may be suspect. The letter implied that the Investment Department did not record that it lost large amounts of money on some
of its investments. Further, the letter stated that the bookkeeper in the Investment
Department who is supposed to record investment transactions and their status is
having a problem with alcohol. Ed doesnt know what to do.
He was afraid of something like this. When he first came into the Region he
raised questions to the Regional Financial Officer (RFO) and Controller about
the internal control procedures. The RFO had looked into the issue and gave Ed
informal assurances over lunch that the procedures were darn sound. On the
other hand, the Controller sent Ed a list of changes he wanted to make in the
internal controls. Ed didnt know if these were in place not or not; he just assumed
that the Controller had put them in place.
Now everything seemed to be falling apart. To investigate the allegations
would take days. There would be serious ramifications for the Company if the
anonymous tip was true. But, Ed also knew that if the President knew of this he
would ask him to stay in the Region until everything was resolved. Ed was tired
of the Midwest and wanted to be with his family and friends in Philadelphia.

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AUTHORS BIO
David F. Bean is an Associate Professor of Accounting at Iona College. He has
published in the areas of ethics, pensions, pedagogy and communications. He
currently teaches courses in advanced and managerial accounting.
Jill DAquila is an Associate Professor of Accounting at Iona College. She has
published in the areas of internal control, business ethics, financial reporting,
and teaching techniques. She currently teaches courses in auditing, financial
accounting, and managerial accounting.
Hagan School of Business
Iona College
715 North Avenue
New Rochelle, NY 10801
USA
E-mails: dbean@iona.edu and jdaquila@iona.edu