Extensive Case 3

You work for a small manufacturing firm, where it is clearly too expensive to have proper segregation of duties. Because of this lack of control, manage-ment knows that opportunities exist to perpetrate fraud within the company. Management is particu-larly concerned with possible collusion between pur-chasing agents and vendors because of the relatively small size of the company and the fact that a single purchasing agent is often solely responsible for a vendor’s account. Management knows now that a lot of money can be saved by proactively preventing fraud and not just acting on a reactionary or crisis basis. They have started to establish an open- door policy where all employees are encouraged to talk about pressures and opportunities faced while on the job. Management also wants to establish a hot-line where employees can report suspicious activity.

a. Is an employee hotline necessary?

 b. Is this sort of whistle- blowing ethical?

c. What can management do as they establish this hotline to encourage employees to actu-ally use it?

2. During the past year, your company has discovered three major frauds. The first was a $ 3.9 million theft of inventory that had been going on for six years. The second was a $ 2.8 million kickback scheme in-volving the most senior purchasing agent. She had been allowing certain customers to overcharge for products in return for personal payments and other financial favors. The third was an overstatement of receivables and inventories by a subsidiary manager to enhance reported earnings. Without the over-statement, his unit’s profit would have fallen far short of budget. The amount of overstatement has yet to be determined. All three of these frauds have been reported in the financial newspapers and have been embarrassing to the company. In response to these incidents, the board of direc-tors has demanded that management take “ positive steps to eliminate future fraud occurrences.” In their words, they are “ sick and tired of significant hits to the bottom line and negative exposure in the press.” The responsibility to develop a program to eradicate fraud has fallen on your shoulders. You are to out-line a comprehensive plan to prevent future frauds. In devising your strategy, outline the roles the fol-lowing groups will play in preventing fraud: 

Top Management                         Middle Management 

Internal Audit                                                 Corporate Security 

Audit Committee                             Legal Counsel

Why are each of the groups above reluctant to take the responsibility for detecting and preventing fraud? Who should be responsible? Debate the issues.

Complete Extensive Case 3 at the end of Chapter 2 in your textbook. The extensive case deals with Johnson Manufacturing and managerial accounting fraud.

Considering Extensive Case 3, address the following questions in the form of a short essay:

• What factors in Johnson’s control environment led to and facilitated the manager’s manipulation of inventory?
• What pressures did Harris feel in deciding to overstate inventory?
• What rationalization did Harris use to justify her fraud?

If using outside sources all source citation should adhere to the guidelines of the APA style guide.