Name: Jay Lloyd A.

Sambog
Course & Year: BSA - 3
Instructions: The following description is excerpted from “Coupon Accounting Abuse,”
Management Accounting, January 1993, p. 47.
It’s November 15, and Gary, brand manager for a major consumer products firm, is
contemplating his year-end bonus. It is becoming increasingly obvious that unless he
takes action, he will not achieve his brand profitability target for the year. Gary’s eyes
fall on the expense estimate for the new coupon “drop” slated for later in the month. His
hand trembles slightly as he erases the 4 percent anticipated redemption rate on his
estimate sheet and replaces the figure with 2 percent. Gary knows from experience that
2 percent is an unrealistically low figure, but he also knows that neither the firm’s
independent nor internal auditors will seriously challenge the estimate. This way, Gary’s
product profitability report will reflect the increased revenue associated with the coupon
“drop” this year, but the entire redemption cost will not be expressed until next year.
“That should put me over,” he muses. A wry smile crosses his face. “If the auditors
question the rate, I’ll give them a story about seasonality and shifting consumer
patterns. They won’t know enough about marketing to question my story.” Eventually, of
course, the actual cost of the coupon drop will have to be expensed, and that will hurt
next year’s profit figure. “But that’s next year,” Gary reasons, “and I can always figure
out a way to make it up. Besides, by the end of next quarter, I’ll be handling a bigger
brand—if I can show a good profit this year.” A brief description of coupons and proper
accounting for coupons might help us to interpret the situation just presented. Coupons
are “cents off” privileges, such as $0.50 off when you buy a certain brand of yogurt.
When a company offers coupons to consumers, it must estimate the redemption rate
and record an expense and the corresponding liability.
This is similar in concept to warranty expenses.
Required: Answer the following questions
a. Discuss whether the situation described can happen to a company with a good
control environment.
Answer:
A company must have good accounting internal controls. A company that has a good
control environment will help hamper fraud as it sets the tone of an organization and
influences the control consciousness of its employees as well as the foundation for all
other components of internal control, and it provides the discipline and structure of all
other components (Turner, Weickgenannt, and Copeland, 2017, p. 83, para. 2). But,
undeniably these controls can only provide a company with reasonable assurance.
Now, regarding the case of Gary, the brand manager who has committed fraud. As hard
as it seems, it would be challenging even for a company to detect fraud even if it has a
good control environment. In what is known as management override, managers can
simply manipulate a company’s internal controls just like Gary has done. To sum up, the
COSO Internal Control—Integrated Framework (2013) states that an “Internal control
system is… able to provide reasonable assurance—but not absolute assurance, to an
entity’s senior management and board of directors… While internal control provides
reasonable assurance of achieving the entity’s objectives, limitations do exist...
Limitations may result from the… ability of management to override internal control.”
b. Describe any steps a company could take to prevent such abuse.
Answer:
Every problem has a solution as with this matter, a company could take many steps or
procedures as solutions to somehow prevent fraudulent acts or fraud abuse. Firstly, is
to consider if a company has implemented a strong code of ethics policy known as the
procedures. As we know that every manager and employee should be trained and very
aware of the policy and these procedures must be rigidly enforced. This will help in
maintaining the integrity and ethics of the workforce. Secondly, lines of authority must
be established, and managers’ jobs and duties are clear to them — in short, the
segregation of duties. In this case, Garry clearly has complete control overestimating
the coupon liability. Through segregation of duties, there should be approval by another
manager at the company with regards to the estimated liability in such a way that a
company should inform independent and internal auditors of the significance that
coupons are included in the presented financial statements. Furthermore, the members
of the board must examine reports and hold top management accountable for the
accuracy of these reports.
c. List those parties who might be harmed by this situation.
Answer:
The impact of fraud goes well beyond financial loss. Fraud impacts people, industries,
entities, services, and the environment (Commonwealth Fraud Prevention Centre, 2019)
and is often mistakenly considered a victimless crime. However, fraud can have
considerable social and psychological effects on individuals, businesses, and society
(CIMA, 2009). Through understanding the case, Gary is basically putting himself at risk
because if he is caught with his fraudulent action, his job will be halted and he will be
prosecuted, accordingly. Why so? He is harming multiple parties in such a manner that
when he replaces the 4% anticipated redemption rate with 2%, he is certainly increasing
revenue making the company look more profitable than it really was. This is misleading
to managers and shareholders, especially to those investors outside who are reading
the financial statements and are seeking for a company to trust into and invest in.
Nonetheless, it could be bad for the business if these people would think that a brand is
doing better than it really is — confusion may be formulated. Furthermore, the
shareholders will also primarily be impacted in the following year because of these
liability expenses that are possibly being added.
d. Do you consider this example to be management fraud or employee fraud?
Describe how it fits the definition of your choice.
Answer:
This is perhaps to be a management fraud. In 2017, Turner, Weickgenannt, and
Copeland defined management fraud as being conducted by upper‐level managers and
usually involves fraudulent financial statements. Managers are above the level of most
internal controls; therefore, internal controls are usually not effective in preventing or
detecting management fraud. Additionally, even if it is a good set of internal controls,
there is always a chance that it may not be as effective in reducing the occurrence of
management fraud. Gary, indeed has committed fraud and also developed an
improvident view and knew that he would be managing another brand in the next year
with confidence. That was a risk there already to be considered and should catch an
immediate action during or before for future references of the company. Hence, the
most effective measure to prevent or detect management fraud is to establish a
professional internal audit staff that periodically checks up on management activities
and reports to the audit committee of the board of directors (Turner, Weickgenannt, and
Copeland, 2017, p. 74).