Question

You serve on the board of directors of a multinational manufacturing company. You have just received a whistleblower complaint that one of the managers in another country, where a large production facility is located, has been understating manufacturing cost to make his production results look better that other facilities. Questions: 1. What should you do with this information? 2. As a board member, can you immediately involve the top management of the corporation in your actions, whatever the actions may be? 3. Is this fraud and what are the risks to the company if this fraud is significant to the company’s financial statements?

Answer 1

1. What should you do with this information?

This is very serious matter so as a member of board of directors I have to consider this matter on priority basis because such compaints against a manufacturing company which is operating in various country can not be said of little importance.

Thus overall I can say that as a board member it is my duty to take timely action which are fair & appropiate in such condition to manage the image of the company and to prevent future occurrence of such unwanted events.

2. As a board member, can you immediately involve the top management of the corporation in your actions, whatever the actions may be?

Management of the company is not work on the basis of single person. Management consist of various top level employees hence I will bring this matter into the notice of top management so that quick & correct actions can be taken to prevent such unethican & illegal actions of the manager.

As we know that official decisions of the company can not be taken by a single official hence this matter will be handled by whole top level management or board of directors with majority.

So overall I can say that I will bring this matter into the notice of top management.

3. Is this fraud and what are the risks to the company if this fraud is significant to the company’s financial statements?

Yes, this is a fraud because any action of the employee of a company which either positively or negatively affect financial figures of the company are known as fraud actions. So on the basis of this it is clear that action of the manager is fraud.

Yes this fraud is relevant to the company’s financial statements because understatement of manufacturing costs will affect income statement and balance sheet of the company hence any item which affect either income statement or balance sheet or both are known as relevant to the financial statements.

As this understatement of manufacturing costs will overstate net income of the company and also overstate retained earnings in the balance sheet. Thus overall it is true that this action of the manager is very risky to the compnay financial statement and also significant for the company.