Case: ETHICS, INTERNAL CONTROLS, AND THE CAPITALIZATION DECISION

James Sage, an assistant controller in a large company, has a friend and former classmate, Henry Cactus, who sells computers. Sage agrees to help Cactus get part of the business that has been going to a large national computer manufacturer for many years. Sage knows that the controller would not approve a shift away from the national supplier but believes that he can authorize a number of small orders for equipment that will escape the controller's notice. Company policy requires that all capital expenditures be approved by a management committee; however, expenditures under $2,000 are all expenses and are subject to much less scrutiny. The assistant controller orders four computers to be used in a distant branch office. In order to keep the size of the order down, he makes four separate orders over a period of several months.

Required:

1. What are the probable consequences of this behavior for the company? For the assistant controller?

2. Describe internal control procedures that would be effective in discouraging and detecting this kind of behavior.