Don’t Play Games!

Characters:
Russ, President
Monica, Vice President-Small Business Loans at local bank
Rick, Controller

Rick was hired as Controller to help sort out and organize the records of a $7 million dollar medical supply firm. This
company was recently extended a $1,000,000 small business loan to acquire the assets of a competitor that was going
out of business. In Rick’s view, the acquisition was a financial mess. Inventory records were misplaced or inaccurate, and
no one could 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 and poor 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 consolidated entity’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 bit nervous 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 reimbursing petty cash), there was a sense
of optimism within the organization. As the company penetrated the nursing home industry, it was pulling in enormous
profits from Medicare due to markups at eight times its costs. As a result of these sales, the firm would start earning a
small profit in the fourth quarter. Even at the end of the year, however, Russ did not want to mention these sales figures
to the bank or accrue the revenue and accounts receivable until the checks arrived, because he was unsure when the
government would be paying for the goods, and more importantly, because he wanted to have something in his back
pocket in case the bank wanted to foreclose. Furthermore, Russ, as the majority stockholder in the firm, 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 bank that the company’s financial
status was better than was reported. Still, it was not his company, and he needed to keep his job. He knew that Russ
would “play games” with other people, 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’s trust.

Question guide:
1. What Are the Relevant Facts?
2. What Are the Ethical Issues?
3. Who Are the Primary Stakeholders?
4. What Are the Possible Alternatives?
5. What Are the Ethics of the Alternatives?
6. What Are the Practical Constraints?
7. What Actions Should Be Taken?
Truth or Consequences

Characters:
Dawn Sunshine, Controller of a medium-sized company
Bill Donner, In-charge CPA

Bill Donner, CPA, is the senior in-charge of an audit of a medium-sized ($20M in assets) client, Minter Metroplex. The
controller of Minter is Dawn Sunshine, CPA who had been a staff accountant with Bill’s firm. Dawn left the firm about a
year ago. Dawn had worked with Bill in the past. They had dated approximately five years ago, before Dawn’s marriage.
Bill had attempted to renew their relationship after Dawn’s divorce, but Dawn had not expressed any interest in dating
him.

During the year-end audit phase, Bill discovered, through his analytical review, that the gross profit ratio for Minter had
been materially understated. His investigation revealed that the company failed to record last year’s LCM inventory
adjustment to the perpetual records. Although last year’s ending inventory control balance was written down, the
individual inventory cost amounts were never revised downward. Therefore, this year’s gross profit and pretax were
understated by $300,000.

When Bill presented this evidence to Dawn, she agreed that her department had erred in not posting this prior year’s
adjustment to the subsidiary inventory records. Unfortunately, because the interim financial statements reflected these
depressed earnings, the company had laid off three administrative people, including one of Dawn’s assistants.

Dawn was apprehensive about bringing this omission to management’s attention because of the layoffs and other
corrective actions that Minter had pursued, including abandoning a $20,000 option payment made on a parcel of land
for expansion of the warehouse facilities.

Bill was sympathetic with Dawn’s anxiety about disclosing this information since he felt that such an admission of
oversight could have a detrimental impact on her career with Minter. Bill proposed that the $300,000 correction could
be disguised as a recent reinterpretation of the uniform capitalization rules. Management had never understood these
rules, and Bill knew that their ignorance--coupled with euphoria over additional income--would not lead to any
additional questions regarding this windfall. Bill suggested to Dawn that they meet for dinner and then go over to his
place later to talk about it. Dawn agreed.

Question guide:
1. What Are the Relevant Facts?
2. What Are the Ethical Issues?
3. Who Are the Primary Stakeholders?
4. What Are the Possible Alternatives?
5. What Are the Ethics of the Alternatives?
6. What Are the Practical Constraints?
7. What Actions Should Be Taken?
Conflicting Clients

Characters:
Jennifer Grace, First-year member of her CPA firm’s management group
Tom Ward, CFO of Fantastic Developments, Inc., a client

While reviewing the current-year audit working papers of Coshocton National Bank (CNB), the engagement manager,
Jennifer Grace, noted something curious. In the working papers related to loan valuation, Jennifer saw that the
commercial loan of Fantastic Developments had been randomly selected for confirmation but that Fantastic had not
responded to either the initial or second confirmation request. The audit staff disposed of this “loose end” by alternate
procedures: examining cash collections (which had become somewhat sporadic) and vouching to underlying loan
documentation, including a set of recent (unaudited) financial statements that showed Fantastic’s solid financial position
and operating profitability.

Jennifer noted this reference to Fantastic Developments because this private company was also a client of her firm. In
fact, Jennifer had served as the audit senior on the prior-year audit of Fantastic. She knew that the company had been
struggling for a couple of years and had experienced recurring operating losses. Her knowledge of Fantastic did not
reconcile with the discussion in the audit working papers related to the financial statements furnished to the bank.

When Jennifer contacted Fantastic’s CFO, Tom Ward, and inquired about the company’s apparently miraculous
turnaround, he was noncommittal and unhelpful. Tom replied that business had picked up. He apologized for not calling
Jennifer’s firm himself because he had been so busy, and then he told her that Fantastic had decided to engage another
CPA firm for its accounting and auditing needs. Although confused, Jennifer obviously couldn’t reject the possibility that
this abrupt dismissal was a direct consequence of her inquiry.

As a result, Jennifer wonders whether the financial statements which Fantastic furnished to the bank as a basis for a loan
application are fraudulent. The bank apparently has no such suspicion, however.

Question guide:
1. What Are the Relevant Facts?
2. What Are the Ethical Issues?
3. Who Are the Primary Stakeholders?
4. What Are the Possible Alternatives?
5. What Are the Ethics of the Alternatives?
6. What Are the Practical Constraints?
7. What Actions Should Be Taken?
ZZ Cinema

Characters:
John, Manager of Theatre Franchise
William, Assistant Manager of Theatre
Diana, Staff Accountant of Franchise
Jodi, Ticket seller and cashier
Bob, Doorman

Diana is a college graduate with accounting as her major and is planning to take the CPA exam. She recently accepted
the Staff Accountant’s position with the ZZ Cinema Franchise. There are 20 theatres that are owned by the Franchise in a
widely spread geographic area.

John is manager of all the locations of the theatre franchise and William, distantly related to him, is the Assistant
Manager working solely at his location. Jodi sells tickets from a glass cage and collects the cash from patrons. At the end
of the last show, he adds up the cash receipts, reconciles his sales and hands over unsold tickets and cash to William.
Bob, the doorman, collects the tickets from incoming patrons, tears the tickets into two, hands over one to the patron
and drops the second half into a little locked box which William picks up at the end of the day. William prepares the
bank deposit slip, deposits the cash in the bank, and keeps the bank receipts and the unsold tickets in the office safe to
which he has the only key. William also prepares the bank reconciliation statements and submits weekly sales reports to
Diana.

Of late, William has volunteered quite frequently to speed up ticket sales on crowded days by working Jodi’s station at
the sales counter. John has not objected to this practice. During the past month William has been seen driving a fancy
new Lexus to work and seen dining with an attractive blond at the town’s expensive restaurants. Diana finds from
William’s reports that sales have shown no change from previous weeks, even though there appears to be an obvious
and significant increase in movie theatre attendance during the summer season. This puzzles Diana, who suspects this
apparent discrepancy is being pocketed by William. More puzzling, why hasn’t John also noticed this problem? Diana
wonders if she should report her suspicions to someone in authority. After all, she has no proof. More importantly,
should she go to John? He might be involved in this possible scam. What should she do?

Question guide:
1. What Are the Relevant Facts?
2. What Are the Ethical Issues?
3. Who Are the Primary Stakeholders?
4. What Are the Possible Alternatives?
5. What Are the Ethics of the Alternatives?
6. What Are the Practical Constraints?
7. What Actions Should Be Taken?