A new hire’s dilemma: reporting corruption
Laurie Zouharis
Laurie Zouharis is an Instructor
at the Department of
Information Systems and
Operations Management,
Suffolk University, Boston,
Massachusetts, USA.
Disclaimer. This case is written
solely for educational purposes
and is not intended to represent
successful or unsuccessful
managerial decision making. The
author/s may have disguised
names; financial and other
recognizable information to protect
confidentiality.
PAGE 440 j THE CASE JOURNAL
Bill Edwards[1] was a young single man struggling to pay the mortgage on his newly
purchased condominium, monthly fees, car loan, and daily expenses. As such he was often
looking for new opportunities to advance his career. In an economy that was in recession
this was challenging. Since graduating from Boston College with an economics degree,
Bill had held positions at two major retailers as a Sales Manager, Accounts Payable Manager,
and Auditor.
Nicalmic, a global retailer of home furnishings and women’s apparel, was relocating its North
American Headquarters from Cayuga, New York to Boston, and very few staff members were
relocating from New York to Boston. Accordingly, Nicalmic began recruiting new hires in the
areas of finance, marketing, human resources, and purchasing. Bill applied for a position within
Finance and was hired as the new Accounts Payable Manager. He got more experience than he
had bargained for when he discovered that the IRS 1099 reporting flag had been turned off on
his boss’ account without authorization.
The new team roles and responsibilities
For the first few months of their employment, Bill and his peers were diligent in learning their new
jobs, hiring new staff, writing procedures, and generally trying to bring order to what had been
chaos. Within Finance, management and all of their respective direct reports were new to the
company. Only the Treasurer and his one staff person were transferred from the former
New York Headquarters. The CFO was a new arrival, having transferred from the Nicalmic
Continental Europe Division headquartered in Graz, Austria. A controller had not yet been hired,
so an interim controller was in place from an employment agency. The general accounting
manager, accounts receivable manager, and accounts payable manager were all direct reports
to the interim controller (refer to Exhibit 1).
As an experienced Accounts Payable Manager, having worked in Accounts Payable
for four plus years by the time he was hired, Bill had developed a basic set of controls to
ensure the integrity of the data in the transaction processing system. He was not required to do
so, but his prior experience and careful nature encouraged him to institute the following
procedure:
1. Only fully approved transactions could be data entered into the transaction processing
system.
2. All planned payments were reviewed and signed-off by him prior to issuance. This was to act
as a deterrent to any possible fraud within his department and also as a final validation check
on vendor payments. For example, a vendor who typically submitted invoices under $500
would not suddenly be paid $50,000 without a verification of the invoice document.
3. Every morning Bill reviewed all of the additions, changes, and deletions that had been made
to the vendor master file system the previous day. In order for a vendor to be paid, the
j VOL. 12 NO. 3 2016, pp. 440-448, © Emerald Group Publishing Limited, ISSN 1544-9106 DOI 10.1108/TCJ-12-2015-0076
 company or person had to be set up with name, address, and tax reporting information in the
vendor master file. Because the vendor master file was where fraud would most likely have
begun, the ability to make additions and changes was highly restricted with system security.
Only the controller, who was Bill’s boss, Bill, and two of his staff had the ability to add,
change, and delete vendor records.
After about four months, the chaos had settled and new hires were fitting well into their new roles.
The interim controller was hired by the company as a permanent employee.

Questionable actions
Shortly thereafter, when performing the daily vendor master file audit on prior day additions/
changes/deletions, Bill discovered that the vendor number under which the controller had been
paid during his tenure as the interim controller had the Internal Revenue Service 1099-MISC
reporting flag turned off, and his social security number had been deleted from the system. With
this change to the system, the $40,000 in nonemployee compensation that had been paid to him
would not be reported to the IRS.
Concerned, Bill verified with his other two staff members who had security access to the vendor
master file that they had not made the change. They would have had no reason to do so and
would not have benefited from doing so. It was well known within the department that the US
Internal Revenue Service regulations required the reporting on IRS Form 1099-MISC to both the
vendor and the Internal Revenue Service, of all payments for services rendered aggregating to
greater than or equal to US$600 in a calendar year. The purpose was to ensure that service
providers, such as consultants and contractors, reported their earnings on their tax return filings
(refer to Exhibit 2).
Having confirmed that his staff had not made the change to the controller’s vendor record, and
knowing that he himself had not made the change, that left the controller as the only other person
who had security access to have made the change.

What to do?
Bill wondered what to do. Should he challenge the controller on the unauthorized
vendor file update or let the unauthorized change go unchallenged? Who could he go to?
Bill reasoned that the only “long time” employee of the company, at least within the finance area,
was the company treasurer. Should he go to him? Should he point it out to his boss, the
controller himself? How could he do that, knowing full well that the controller had
made the change to his own record? Should he report it directly to the IRS? (refer to Exhibit 3).
He thought about the ramifications to himself, keeping in mind the personal impact of the loss of
the badly needed regular paycheck, as well as to the company and his boss of these
options and contemplated his next move. How could he save his own position in the company,
protect his reputation, protect the company reputation and still do what he knew was the
“right thing?”

Note
1. All names have been changed to protect confidentiality.

VOL. 12 NO. 3 2016 j THE CASE JOURNAL j PAGE 441

 Exhibit 1

Figure A1 Finance department organization chart

CFO
New Hire Transferred
from Nicalmic Europe

Interim
Treasurer
Controller
Transfer from Nicalmic
Temporary Hire NJ Headquarters

Treasurer Staff
Transfer from Nicalmic
NJ Headquarters

General Accounts
Accounting Receivable Accounts Payable Financial Planning
Analysis Manager
Manager Manager Manager Manager
New Hire New Hire New hire New Hire New Hire

Staff Staff Staff Staff Staff

New Hire New Hire New Hire New Hire New Hire

Exhibit 2. IRS guidelines on reporting payments to independent contractors

If you pay independent contractors, you may have to file Form 1099-MISC, miscellaneous
income, to report payments for services performed for your trade or business. If the following four
conditions are met, you must generally report a payment as nonemployee compensation (www.
irs.gov/Businesses/Small-Businesses-&-Self-Employed/Reporting-Payments-to-Independent-
Contractors):
1. you made the payment to someone who is not your employee;
2. you made the payment for services in the course of your trade or business (including
government agencies and nonprofit organizations);
3. you made the payment to an individual, partnership, estate, or in some cases, a corporation;
and
4. you made payments to the payee of at least $600 during the year.

Exhibit 3. How do you report suspected tax fraud activity?

If you suspect or know of an individual or a business that is not complying with the tax laws on
issues such as: false exemptions or deductions, kickbacks, false/altered document, failure to pay
tax, unreported income, organized crime, or failure to withhold use Form 3949-A, information
referral or send a letter to the Internal Revenue Service. Although you are not required to identify
yourself, it is helpful to do so. Your identity will be kept confidential (www.irs.gov/Individuals/How-
Do-You-Report-Suspected-Tax-Fraud-Activity%3F).

Corresponding author
Laurie Zouharis can be contacted at: lzouharis@suffolk.edu

PAGE 442 j THE CASE JOURNAL j VOL. 12 NO. 3 2016