Concept explainers
The following story is true except that all names have been changed and the time period has been compressed:
Charles Austin graduated from a prestigious business school and took a job in a public accounting firm in Atlanta. A client hired him after five years of normal progress through the ranks of the accounting firm. This client was a rapidly growing, publicly held company that produced software for the health care industry. Charles started as assistant controller. The company promoted him to controller after four years. This was a timely promotion. Charles had learned a lot and was prepared to be controller.
Within a few months of his promotion to controller, the company’s chief financial officer abruptly quit. Upon submitting her resignation, she walked into Charles’s office and said, “I have given Holmes (the company president) my letter of resignation. I’ll be out of my office in less than an hour. You will be the new chief financial officer, and you will report directly to Holmes. Here is my card with my personal cell phone number. Call me if you need any advice or if I can help you in any way.”
Charles was in over his head in his new job. His experience had not prepared him for the range of responsibilities required of the company’s chief financial officer. Holmes, the company president, was no help. He gave Charles only one piece of advice: “You have lots of freedom to run the finance department however you want. There is just one rule: Don’t ever cross me. If you do, you’ll never work again in this city.” Charles believed his boss could follow through on that threat because he was so well-connected in the Atlanta business community.
The end of the company’s fiscal year came shortly after Charles’s promotion to chief financial officer. After reviewing some preliminary financial amounts, Holmes stormed into Charles’s office and made it clear that the results were not to his liking. He instructed Charles to “find more sales.” Charles was shocked, but he did as he was told. He identified some ongoing software installation work that should not have been recorded as revenue until the customer signed off on the job. Charles recorded the work done as of year-end as revenue, even though the customer had not signed off on the job. He sent an invoice to the customer for the amount of the improper revenue, then called her to say that the invoice was an accounting error and she should ignore it.
Next year, Charles’s work life was better but his personal life was not. He went through a costly divorce that resulted in limited time spent with his two small children. Now he was particularly concerned about not crossing his boss because of the threat that he would never work in Atlanta if he did. He could not bear to look for a new job that would take him away from his children. Further, it would be difficult to find a job anywhere that came close to paying the salary and benefits of his current job. With high alimony and child support payments, Charles would feel a dire financial strain if he had to take a cut in pay.
The company struggled financially during the year. Clearly, the company would not generate the level of revenues and income that Holmes wanted. As expected, he again instructed Charles to find some way to dress up the income statement. It did not matter to Holmes whether what Charles did was legal or not.
Charles had exhausted all legitimate ways of reducing costs and increasing revenues. He faced an ethical dilemma. He could resign and look for a new job, or he could illegitimately record nonexistent sales. He now understood why the former chief financial officer had resigned so abruptly. He wished that he could talk to her, but she was traveling in Australia and could not be contacted. The board of directors would be no help because they would take the president’s side in a dispute.
After considering his personal circumstances, Charles decided to record the illegitimate sales as the president had instructed. Charles knew that what he did was wrong. He believed that if the fraud was discovered, Holmes, not he, would be in trouble. After all, Charles rationalized, he was just following orders.
Required
- a. Can you justify what Charles did?
- b. What could Charles have done to avoid the ethical dilemma that he faced? Assume that the company president would have made it impossible for Charles to work in Atlanta in a comparable job.
- c. What if the Securities and Exchange Commission discovered this fraud? Would Charles’s boss get in trouble? Would Charles?
Want to see the full answer?
Check out a sample textbook solutionChapter 1 Solutions
FUNDAMENTALS OF COST ACCOUNTING
- Your public accounting practice is located in a city of 15,000 people. The majority of your work, conducted by you and two assistants, consistsof compiling clients’ monthly statements and preparing income tax returns for individuals from cash data and partnership returns from books and records. You have a small number of audit clients; given the current size of your practice, you generally consider it a challenge to accept new audit clients.One of your corporate clients is a retail hardware store. Your work for this client has been limited to preparing the corporate income tax return from a trial balance submitted by the bookkeeper.On December 26, you receive from the president of the corporation a letter containing the following request:We have made arrangements with First National Bank to borrow $500,000 to finance the purchase of a complete line of appliances. The bank has asked us to furnish our auditors’ certified statement as of December 31, which is the closing date of our…arrow_forwardFive years ago when Bobby Bret joined Crystal Productions as a junior accountant, he felt that he was on his way up. He had just graduated with a B+ average from college, where he was well liked by his peers and by the faculty and had been an officer in several student organizations. Bobby had shown a natural ability to get along with people as well as to get things done. He remembered what Roger Friedman, the controller at Crystal, had told him when he was hired: “I think you will do well here, Bobby. You’ve come highly recommended. You are the kind of guy that can expect to move right on up the ladder.” Bobby felt that he had done a good job at Crystal, and everybody seemed to like him. In addition, his performance appraisals had been excellent. However, after five years he was still a junior accountant. Hehad applied for two senior accountant positions that had opened, but they were both filled by people hired from outside the firm. When the accounting supervisor’s job came open…arrow_forwardRichard has been a highly regarded employee of the Brier Corporation for almost 20 years. Her loyalty to the company is reflected in her dedication to her job as a general accounting clerk, from which she has not taken a vacation in almost 12 years. Because of her dedication and long tenure, she has acquired many related responsibilities, which have allowed Brier Corporation to reduce its workforce through attrition, control salary expenses and become more efficient and competitive. The following describes Richard's responsibilities. Richard receives copies of credit sales orders from the sales department. She accesses the AR subsidiary ledger from her office computer and records the AR from these documents. She then records the sale in the sales journal and posts the transactions to the general ledger accounts. Cash receipts in payment of customer AR come directly to her office. She records the cash receipts in the GL cash and AR accounts and updates the AR subsidiary ledger. She…arrow_forward
- Richard has been a highly regarded employee of the Brier Corporation for almost 20 years. Her loyalty to the company is reflected in her dedication to her job as a general accounting clerk, from which she has not taken a vacation in almost 12 years. Because of her dedication and long tenure, she has acquired many related responsibilities, which have allowed Brier Corporation to reduce its workforce through attrition, control salary expenses and become more efficient and competitive. The following describes Richard's responsibilities. Richard receives copies of credit sales orders from the sales department. She accesses the AR subsidiary ledger from her office computer and records the AR from these documents. She then records the sale in the sales journal and posts the transactions to the general ledger accounts. Cash receipts in payment of customer AR come directly to her office. She records the cash receipts in the GL cash and AR accounts and updates the AR subsidiary ledger. She…arrow_forwardAssume that you are the chairman of the Department of Accountancy at Mountain State University. One of the accounting professors in your department, Dr. Cruz, has been consistently and uniformly regarded by students as an awful teacher for more than 10 years. Other accounting professors within your department have observed Dr. Cruz's classroom teacher and they concur that his teaching skills are very poor. However, Dr. Cruz was granted tenure 12 years ago, thereby ensuring him life-long job security at Mountain State University. Much to your surprise, today you received a phone call from an accounting professor at University of Eastern Philippines. During this phone call you are informed that the University is on the verge of making a job offer to Dr. Cruz. However, before extending the job offer, the faculty at the University wants your input regarding Dr. Cruz's teaching effectiveness while at Mountain State University. Required: How would you respond to the professor from University…arrow_forwardYou are working in a mid-size company for the last couple of years. Recently you are promoted as a Chief Information Officer (CIO) and excited to perform your new role efficiently. David Savage, Chief Operation Officer (CEO) of your company has decided to implement an Enterprise ResourcePlanning (ERP) system. David Savage has met with a consulting ERP firm based on a recommendation from a friend at his club. During a recent meeting, David Savage introduced the chief consultant, who was charming, was personable, and seemed very knowledgeable. The CEO’s first instinct was to sign a contract with the consultant, but he decided to hold off until he had received your input.Required: (350 words)David Savage asked you to write a memo presenting the issues and the risks associated with consultants. Further, outline a set of procedures that could be used as a guide in selecting a consultant.---------------arrow_forward
- Your answer is partially correct. As a new intern for the local branch office of a national brokerage firm, you are excited to get an assignment that allows you to use your accounting expertise. Your supervisor provides you with the spreadsheet below, which contains data for the most recent quarter for three companies that the firm has been recommending to its clients as "buys." Each of the companies' returns on assets has outperformed their industry cohorts in the past. But, given recent challenges in their markets, there is concern that the companies may experience operating challenges and lower earnings. (All numbers in millions, except return on assets.) Company Sprint Nextel Washington Mutual E* Trade Financial Fair Value of Company $36,351 11,582 Loss on Impairment Account Titles and Explanation Goodwill 1,628 eTextbook and Medial Book Value (Net Assets Including Goodwill) $51,201 23,941 4,024 Carrying Value of Goodwill $30,618 9,052 2,015 (c) Estimate the amount of goodwill…arrow_forwardYou are working in a mid-size company for the last couple of years. Recently you are promoted as a Chief Information Officer (CIO) and excited to perform your new role efficiently. David Savage, Chief Operation Officer (CEO) of your company has decided to implement an Enterprise Resource Planning (ERP) system. David Savage has met with a consulting ERP firm based on a recommendation from a friend at his club. During a recent meeting, David Savage introduced the chief consultant, who was charming, was personable, and seemed very knowledgeable. The CEO’s first instinct was to sign a contract with the consultant, but he decided to hold off until he had received your input.Required:David Savage asked you to write a memo presenting the issues and the risks associated with consultants. Further, outline a set of procedures that could be used as a guide in selecting a consultant.arrow_forwardJenny Cochran, a graduate of The University of Tennessee with 4 years of experience as an equities analyst, was recently brought in as assistant to the chairman of the board of Computron Industries, a manufacturer of computer components. During the previous year, Computron had doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Cochran was assigned to evaluate the impact of the changes. She began by gathering financial statements and other data. (Data Attached) What is Computron’s free cash flow (FCF)? What are Computron’s “net uses” of its FCF? Calculate Computron’s return on invested capital (ROIC). Computron has a 10% cost of capital (WACC). What caused the decline in the ROIC? Was it due to operating profitability or capital utilization? Do you think Computron’s growth added value? What is Computron's EVA? The cost of capital was 10% in both years. Assume that a corporation has $200,000 of taxable income…arrow_forward
- Jenny Cochran, a graduate of The University of Tennessee with 4 years of experience as an equities analyst, was recently brought in as assistant to the chairman of the board of Computron Industries, a manufacturer of computer components. During the previous year, Computron had doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Cochran was assigned to evaluate the impact of the changes. She began by gathering financial statements and other data. (Data Attached) What caused the decline in the ROIC? Was it due to operating profitability or capital utilization? Do you think Computron’s growth added value? What is Computron's EVA? The cost of capital was 10% in both years. Assume that a corporation has $200,000 of taxable income from operations. What is the company's federal tax liability? Assume that you are in the 25% marginal tax bracket and that you have $50,000 to invest. You have narrowed your investment…arrow_forward'Jenny Cochran, a graduate of The University of Tennessee with 4 years of experience as an equities analyst, was recently brought in as assistant to the chairman of the board of Computron Industries, a manufacturer of computer components. During the previous year, Computron had doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Cochran was assigned to evaluate the impact of the changes. She began by gathering financial statements and other data. (Data Attached) What effect did the expansion have on sales and net income? What effect did the expansion have on the asset side of the balance sheet? What do you conclude from the statement of cash flows? What is Computron’s net operating profit after taxes (NOPAT)? What are operating current assets? What are operating current liabilities? How much net operating working capital and total net operating capital does Computron have? What is Computron’s free cash flow…arrow_forwardYou are the chief information officer for a midsized organization that has decided to implement an ERP system. The CEO has met with a consulting ERP firm based on a recommendation from a personal friend at his club. At the interview, the president of the consulting firm introduced the chief consultant, who was charming, personable, and seemed very knowledgeable. The CEO’s first instinct was to sign a contract with the consultant, but he decided to hold off until he had received your input. Required Write a memo to the CEO presenting the issues and the risks associated with consultants. Also, outline a set of procedures that could be used as a guide in selecting a consultant.arrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education