MINICASE: ACCT – 14 BUSINESS ETHICS PROGRAM

ZZ Cinema

Topic: Internal Control (Segregation of Duties)

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?

Author: Hema Rao, CPA, DBA, Assistant Professor, School of Business, University of
Wisconsin-Parkside
Co-author: Charles Alworth, Assistant Professor of Accounting, Texas A&I University

1992 Arthur Andersen & Co, SC. All rights reserved. Page 1 of 1
ACCOUNTING MINICASE: ACCT – 14 BUSINESS ETHICS PROGRAM
TEACHING NOTES

ZZ Cinema
Teaching Notes

What Are the Relevant Facts?

1. What are the benefits to the owners, John and
1. Diana is new on the job. Diana, if William is fired?
2. Diana suspects William of siphoning off the extra 2. What are the costs to the owners if William
sales revenue. continues?
3. She has no proof to back up her suspicions. 3. What are the costs to the owners if William is
fired even though he is innocent?
4. William has been consuming conspicuously.
4. What are the costs to Diana if she is wrong?
5. John may not suspect William of wrongdoing.
5. What are the costs if Diana does nothing?
6. Poor internal control and a lack of segregation of
duties exist. • Rights approach:
7. Evidently, franchise owners are not aware of the 1. Do the owners have a right to expect Diana to
problem or trust John, who is their agent. blow the whistle on William?

What Are the Ethical Issues? 2. Are William’s rights violated if Diana reports
and he is innocent?
1. Does Diana have an obligation to protect the
interests of the franchise owners? 3. Are the owner’s rights violated if Diana does
not report and William is guilty?
2. What effects will her blowing the whistle without
any valid proof have on William, John, and 4. Are Diana’s rights violated if she is fired if the
herself? owners do not believe her for a lack of
sufficient proof?
3. To what extent is Diana responsible for correcting
the existing poor internal control situation? • Justice approach:

4. Should Diana discuss the problem with John? 1. Who are the parties that benefit if Diana does
nothing?
5. Should Diana collect more evidence against
William? 2. Is Diana justified in reporting William without
valid proof of his wrong doing?
Who Are the Primary Stakeholders? 3. Who has most to lose if Diana does nothing?
• Owners of the franchise
What Are the Practical Constraints?
• John
• William 1. Diana may be fired if she is wrong.
• Diana 2. Diana may find it difficult to conduct an
investigation without tipping off William about her
What Are the Possible Alternatives?
suspicions and/or antagonizing him.
1. Confront William with her suspicions.
3. Diana is new on her job and knows very little
2. Talk to John about her suspicions. about William’s relationship with John and the
owner’s trust in John.
3. Talk to the owners about her suspicions about
William. 4. William may end up suing Diana for defamation of
character if she cannot back up her accusations
4. Collect more proof. with proof.
5. Do nothing. 5. Obtaining proof seems to be a difficult job.

What Are the Ethics of the Alternatives? What Actions Should Be Taken?
• Utilitarian approach: 1. Should Diana report?
2. Should she do nothing?

1992 Arthur Andersen & Co, SC. All rights reserved. Page 1 of 2
ACCOUNTING MINICASE: ACCT – 14 BUSINESS ETHICS PROGRAM
TEACHING NOTES

3. Should she recommend remedial steps for poor 4. What ethical theory is most applicable to this
internal control, etc., even though she has no situation? (utilitarian, rights, justice)
specific responsibility to do so?

1992 Arthur Andersen & Co, SC. All rights reserved. Page 2 of 2