Loyalty and Fraud Reporting: Analyzing the Fraud Triangle and

School: Southern New Hampshire University - Course: ACC MANAGERIAL - Subject: Accounting

Case 5-1 Loyalty and Fraud Reporting (a GVV case) Assume Vick and Ethan are CPAs. Ethan Lester was seen as a "model employee" who deserved a promotion to CFO, according to Kelly Fostermann, the CEO of Fostermann Corporation, a Maryland-based, largely privately held company that is a prominent global designer and marketer of stereophonic systems. Kelly considered Lester to be an honest employee based on performance reviews and his unwillingness to accept the promotion, stating that he wasn't ready yet for the position. Little did she know that Lester was committing a $50,000 fraud during 2015 by embezzling cash from the company. In fact, no one seemed to catch on because Lester was able to override internal controls. However, the auditors were coming in and to solidify the deception, he needed the help of Vick Jensen, a close friend who was the accounting manager. Lester could "order" Jensen to cover up the fraud but hoped he would do so out of friendship and loyalty. Besides, Lester knew Jensen had committed his own fraud two years ago and covered it up by creating false journal entries for undocumented sales, returns, transactions, and operating expenses. Lester went to see Jensen and explained his dilemma. He could see Jensen's discomfort in hearing the news. Jensen had thought he had turned the corner on being involved in fraud after he quietly paid back the $20,000, he had stolen two years ago. Here is how the conversation went. "Vick, I need your help. I blew it. You know Mary and I split up 10 months ago." "Yes," Vick said. "Well, I got involved with another woman who has extravagant tastes. I'm embarrassed to say she took advantage of my weakness and I wound up taking $50,000 from company funds." "Ethan, what were you thinking?" "Don't get all moral with me. Don't you recall your own circumstances?" Vick was quiet for a moment and then asked, "What do you want me to do?" "I need you to make some entries in the ledger to cover up the $50,000. I promise to pay it back, just as you did. You know I'm good for it." Vick reacted angrily, saying, "You told me to skip the bank reconciliations—that you would do them yourself. I trusted you." "I know. Listen, do this one favor for me, and I'll never ask you again." Vick grew increasingly uneasy. He told Ethan he needed to think about it ... his relationship with the auditors was at stake.

1.Analyze the facts of the case using the Fraud Triangle. Include a discussion of the weaknesses in internal controls. 2.Which rules of professional conduct in the AICPA Code should Vick consider in deciding on a course of action? Explain. What are Vick's ethical obligations in this matter? (The AICPA Code is mentioned in Chapter 1). 3.Use the "Giving Voice to Values" framework to help Vick decide on his next course of action. Why do you recommend it? (Hint: GVV framework is mentioned in Chapter 2).