Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 7 Sarbanes-Oxley, Internal Control, and Cash 349

Lee Garrett sells security systems for Guardsman Security Co. Garrett has a monthly sales quota

of $40,000. If Garrett exceeds this quota, he is awarded a bonus. In measuring the quota, a sale

is credited to the salesperson when a customer signs a contract for installation of a security sys-

tem. Through the 25th of the current month, Garrett has sold $30,000 in security systems.

Vortex Co., a business rumored to be on the verge of bankruptcy, contacted Garrett on the

26th of the month about having a security system installed. Garret estimates that the contract

would yield about $14,000 worth of business for Guardsman Security Co. In addition, this con-

tract would be large enough to put Garrett “over the top” for a bonus in the current month.

However, Garrett is concerned that Vortex Co. will not be able to make the contract payment af-

ter the security system is installed. In fact, Garrett has heard rumors that a competing security

services company refused to install a system for Vortex Co. because of these concerns.

Upon further consideration, Garrett concluded that his job is to sell security systems and

that it’s someone else’s problem to collect the resulting accounts receivable. Thus, Garrett wrote

the contract with Vortex Co. and received a bonus for the month.

1. Discuss whether Lee Garrett was acting in an ethical manner.


2. How might Guardsman Security Co. use internal controls to prevent this scenario from
   occurring?

WorldCom, the second largest telecommunications company in the United States, became the

largest bankruptcy in history due to financial reporting irregularities and misstatements of

nearly $7 billion. WorldCom’s controller, director of general accounting, and director of man-

agement reporting all pleaded guilty to financial reporting fraud. These employees all stated that

they were ordered by superiors to adjust the records to artificially boost the company’s profits.

Under protest, these employees made the adjustments.

1. Should these employees be held responsible for their actions, since they were “following
   orders”?


2. How should an employee respond to questionable or unethical requests from superiors?

During the preparation of the bank reconciliation for The Image Co., Chris Renees, the assistant

controller, discovered that Empire National Bank incorrectly recorded a $936 check written by

The Image Co. as $396. Chris has decided not to notify the bank but wait for the bank to detect

the error. Chris plans to record the $540 error as Other Income if the bank fails to detect the error

within the next three months.

Discuss whether Chris is behaving in a professional manner.

The following is an excerpt from a conversation between two sales clerks, Carol Dickson and Jill

Kesner. Both Carol and Jill are employed by Reboot Electronics, a locally owned and operated

computer retail store.

Carol:Did you hear the news?

Jill:What news?

Carol:Candis and Albert were both arrested this morning.

Jill:What? Arrested? You’re putting me on!

Carol:No, really! The police arrested them first thing this morning. Put them in handcuffs,

read them their rights—the whole works. It was unreal!

Jill:What did they do?

Carol:Well, apparently they were filling out merchandise refund forms for fictitious customers

and then taking the cash.

BUSINESS ACTIVITIES AND RESPONSIBILITY ISSUES

Activity 7-1

Ethics and professional
conduct in business

Activity 7-2

Ethics and financial statement
fraud

Activity 7-3

Ethics and professional con-
duct in business

Activity 7-4

Internal controls