Assignment- Ethics Case (Due Last Class Day)

The information in the following paragraph was provided in the assignments section of the ACC3301 Fall 2016syllabus.

Task

Professional ethics is fundamental to the practice of accounting. In an effort to enhance your appreciation for ethical behavior and its role in the accounting profession, you will prepare a report applying the fraud triangle to an ethics case. The case will be provided by your instructor. The three components of the fraud triangle are: (1) incentive, motivation, or pressure to commit fraud, (2) opportunity to commit and cover up the fraud, which is often due to weak internal control or lack of internal control and (3) rationalization which is the mindset of the person involved in the fraud justifying committing the fraud.

The report will comprise 5% of your final grade.

AN EXAMPLE OF THE THREE COMPONENTS OF THE FRAUD TRIANGLE:

An example of the three components of the fraud triangle would be Walt Pavlo's reporting of incorrect accounts receivable data in theWorld.com financial statements, resulting in fraudulent financial statements being published. WaltPavlo had pressure to commit fraud because his supervisors expected his Accounts Receivabledepartment to always meet the projected collections numbers set by management. Thus hecreated ways to cause the accounts receivable accounts to "meet" the projected numbers whetherthe accounts actually met those numbers or not. He had opportunity to commit fraud because hehad complete access to the general ledger entries for accounts receivables and all subsidiaryledgers. He recorded all collections, made contact for collections with all large customers, and wasresponsible for determining which accounts would be written-off as uncollectible and when thosewrite-offs would occur. Additionally he was the individual who created the collection of accountsreceivable journal entries, all write-off journal entries, authorized all the write-offs, and reconciledthe accounts receivable subsidiary ledgers to the general ledger. Walt Pavlo rationalized hisreporting of incorrect accounts receivable numbers because he was doing what his supervisorswanted him to do. He considered himself a good team player meeting the expectations of hissupervisors.

This illustration provides an example of (1) motivation through pressure to commit fraud (2) opportunity through weak internal controls over accounts receivable and (3) rationalization to justify the fraud.

SEGREGATION OF DUTIES:

The concept of segregation of duties is an effective accounts receivable internal control. An example of this concept is provided in the following paragraph.

Segregation of duties: recording of accounts receivable should be done by someone whodoes not have access to the subsidiary ledgers for accounts receivable and does not havethe authority to adjust accounts receivable balances through writing-off accounts or issuingcredit memos. Reconciliation of the general ledger accounts receivable accounts (AccountsReceivable and Allowance for Doubtful Accounts) should not be done by the same personwho is responsible for recording accounts receivable or is responsible to authorize accountwrite-offs and credit memos. Segregation of duties refers to separating recording journalentries to the general ledger from handling of the subsidiary ledger accounts fromauthority to adjust the accounts and from the reconciliation of the general ledger to thesubsidiary ledger for accounts receivable.

These examples were prepared by Dr. Beverly Rowe.

Use the "Darren Jones and AE&P Inc. - A Story of Sticky Fingers" case to prepare you report. The case appears on the following page. The case is due on last class day. Submit the case through Black Board e-mail.

Darren Jones and AE&P Inc. - A Story of Sticky Fingers

Darren Jones has been the accounts receivable accountant at AE&P Inc. for 8 years. He has been a dependable employee who completes his work in a timely and professional manner. Darren gets along well with the other employees, has received recognition as employee of the month on several occasions, and is known as the top batter on AE&P's softball team. Darren recently moved into a large new home in an upscale neighborhood. All seems to be going very well in Darren's life.

At AE&P, the accounts receivable accountant (Darren) opens the mail, makes the cash deposit, and posts payments and invoices to the customer subsidiary accounts. Darren provides the general ledger accountant with the verified deposit slip from the bank to make the cash deposit entry on the general ledger and a schedule providing the revenue account amounts from the invoices for the daily customer billing entry . Each day Darren reconciles the general ledger accounts receivable amount to the total of the accounts receivable subsidiary ledger and reviews the customer accounts for any potential uncollectible accounts. If there is an account that is deemed uncollectible, Darren removes the customer's account from the accounts receivable subsidiary ledger and provides the general ledger accountant with the information to prepare the write-off entry.

Five years ago, Darren encountered some very difficult financial circumstances in his personal life. He realized that without some additional source of funds he would have to file bankruptcy. He was desperate to resolve his financial crisis. He decided that he would "borrow" some funds from AE&P by taking cash from the cash deposit, covering his tracks by falsifying the posting to customer accounts. Darren convinced himself that if his supervisors knew of his financial distress they would gladly loan him the funds. Darren made a promise to himself that as soon as he could, he would pay the funds back. However, Darren found that he could not keep this promise as he continued to need additional funds to support his family. Over a period of five years, Darren diverted significant funds to himself, covering up the diversion either by misstating the customer accounts in the accounts receivable subsidiary ledger, recording fictitious discounts or returns for the amount of money diverted, or writing off as uncollectible the accounts of customers whose payments Darren deposited in his own personal account. As time passed Darren thought to himself that he deserved the additional funds he was taking from the customer accounts. After all, he told himself, he had worked hard for AE&P for many years without what he thought were the pay increases or promotions he deserved. Darren's lifestyle had risen to a level that required he divert more and more of AE&P funds into his personal account on a regular basis. Darren's fraud was discovered when he was unexpectedly out of the office for a couple of weeks following emergency surgery. Darren's supervisor gladly took on Darren's duties to help during Darren's absence. While performing Darren's duties, the supervisor discovered a variety of questionable entries in the accounts receivable subsidiary ledgers. Further investigation revealed that Darren had stolen in excess of $250,000 from AE&P Inc. through his accounts receivable fraud.

Required:

Apply the fraud triangle to the case clearly discussing each of the three elements in the fraud triangle using the specific details of the case.

A case written by Dr. Beverly Rowe for use in Intermediate Accounting II.