In: Accounting
Case 3-6 Full Disclosure: The Case of the Morally Challenged AP Clerk
(a GVV case)
John Stanton, CPA, is a seasoned accountant who left his Big-4 CPA firm Senior Manager position to become the CFO of a highly successful hundred-million-dollar privately held manufacturer of solar panels. The company wanted John’s expertise in the renewable energy sector and his pedigree from working for one of the Big-4 firms. The company plans to go public later this year and wants John to lead the effort. Everything went well for the first two months until the controller, Diane Hopkins, who is also a CPA, came to John with a problem. She discovered that one of her accounts payable clerks has been embezzling money from the company by processing and approving fictitious invoices from shell companies for fictitious purchases that the AP clerk had created. Diane estimated that the clerk had been able to steal approximately $250,000 over the year and a half they worked at the company. Diane and John agreed to fire the clerk immediately and did so. They also agreed that John would report the matter to the police.
John picked up the phone and called the CEO, David Laskey, who was also the majority shareholder, to give him a heads up on what had transpired. Laskey asked John to come to his office the next day to discuss the need to report the matter to the police. Laskey shared with John that he did not think it was a good idea to report it to the police as he was fearful of the effect on taking the company public and the initial public offering share price.
After the call, John reflected on what it would mean to not report the matter to the police and whether there were others he needed to inform about the matter.
Questions
To whom do John Stanton and David Laskey owe their ultimate responsibility? Explain.
If Stanton were to agree not to report this embezzlement to the police or disclose it in the annual report and prospectus, would he be violating the integrity or due care rule in the AICPA Code of Professional Conduct? What about acts discreditable?
AssumeStantonispreparingforthemeetingwithLaskey.Considerthefollowingindecidingwhatheshoulddo.
What can he say to Laskey to counteract the reasons Laskey provided not to notify the police?
Who can Stanton rely on for support in this matter? What might he say to that person(s) to encourage their support?
What levers can Stanton use to convince Laskey as to the correct course of action given the company’s impending IPO?
What should Stanton do next if Laskey orders him to drop the matter?
Question: Part-1:- To whom do John Stanton and David Laskey owe their ultimate responsibility?
Answer: Jhon Stanton (CFO) and David Laskey (CEO) are the 2 KMP (Key management persons) of the company. They are primarily responsible to the Board of directors and ultimately to the Shareholders of the company for the performance of the company and any fraud or embezzlement happened in the company.
Question: Part-2:-If Stanton were to agree not to report this embezzlement to the police or disclose it in the annual report and prospectus, would he be violating the integrity or due care rule in the AICPA Code of Professional Conduct?
Answer: AICPA members are bound by the AICPA Code of Professional Conduct. Yes, If Stanton were to agree not to report this embezzlement to the police or disclose it in the annual report and prospectus he be violating the integrity or due care rule in the AICPA Code of Professional Conduct. The below are the brief about the code of conduct:
Section ET 54 – Article
III - Integrity
To maintain
and broaden public confidence, members should perform all
professional responsibilities with the highest sense of
integrity.
Section ET 56 – Article
V – Due Care
A member
should observe the profession's technical and ethical standards,
strive continually to improve competence and the quality of
services, and discharge professional responsibility to the best of
the member's ability.
Question Part-3: AssumeStantonispreparingforthemeetingwithLaskey.Considerthefollowingindecidingwhatheshoulddo.· What can he say to Laskey to counteract the reasons Laskey provided not to notify the police?· Who can Stanton rely on for support in this matter? What might he say to that person(s) to encourage their support?
Answer: Jhon will communicate the facts to Laskey (CEO) and inform him about his responsibility as a CEO of a company that is going to issue IPO to the public. Its CEO’s professional responsibility to disclose all material facts in the prospectus of the IPO. As the amount ($250,000) is material one, the police should be informed.
If the CEO- Laskey does not agree to John’s view to report to police then he should quiet the job as CFO of the company and as a whistle blower, inform the board about the same.