Question

The following story is true except that all names have been changed and the time period has been compressed:

Charles Austin graduated from a prestigious business school and took a job in a public accounting firm in Atlanta. A client hired him after five years of normal progress through the ranks of the accounting firm. This client was a rapidly growing, publicly held company that produced software for the health care industry. Charles started as assistant controller. The company promoted him to controller after four years. This was a timely promotion. Charles had learned a lot and was prepared to be controller.

Within a few months of his promotion to controller, the company's chief financial officer abruptly quit. Upon submitting her resignation, she walked into Charles's office and said, “I have given Holmes (the company president) my letter of resignation. I'll be out of my office in less than an hour. You will be the new chief financial officer, and you will report directly to Holmes. Here is my card with my personal cell phone number. Call me if you need any advice or if I can help you in any way.”

Charles was in over his head in his new job. His experience had not prepared him for the range of responsibilities required of the company's chief financial officer. Holmes, the company president, was no help. He gave Charles only one piece of advice: “You have lots of freedom to run the finance department however you want. There is just one rule: Don't ever cross me. If you do, you'll never work again in this city.” Charles believed his boss could follow through on that threat because he was so well-connected in the Atlanta business community.

The end of the company's fiscal year came shortly after Charles's promotion to chief financial officer. After reviewing some preliminary financial amounts, Holmes stormed into Charles's office and made it clear that the results were not to his liking. He instructed Charles to “find more sales.” Charles was shocked, but he did as he was told. He identified some ongoing software installation work that should not have been recorded as revenue until the customer signed off on the job. Charles recorded the work done as of year-end as revenue, even though the customer had not signed off on the job. He sent an invoice to the customer for the amount of the improper revenue, then called her to say that the invoice was an accounting error and she should ignore it.

Next year, Charles's work life was better but his personal life was not. He went through a costly divorce that resulted in limited time spent with his two small children. Now he was particularly concerned about not crossing his boss because of the threat that he would never work in Atlanta if he did. He could not bear to look for a new job that would take him away from his children. Further, it would be difficult to find a job anywhere that came close to paying the salary and benefits of his current job. With high alimony and child support payments, Charles would feel a dire financial strain if he had to take a cut in pay.

The company struggled financially during the year. Clearly, the company would not generate the level of revenues and income that Holmes wanted. As expected, he again instructed Charles to find some way to dress up the income statement. It did not matter to Holmes whether what Charles did was legal or not.

Charles had exhausted all legitimate ways of reducing costs and increasing revenues. He faced an ethical dilemma. He could resign and look for a new job, or he could illegitimately record nonexistent sales. He now understood why the former chief financial officer had resigned so abruptly. He wished that he could talk to her, but she was traveling in Australia and could not be contacted. The board of directors would be no help because they would take the president's side in a dispute.

After considering his personal circumstances, Charles decided to record the illegitimate sales as the president had instructed. Charles knew that what he did was wrong. He believed that if the fraud was discovered, Holmes, not he, would be in trouble. After all, Charles rationalized, he was just following orders.

Required

1. Can you justify what Charles did?

2. What could Charles have done to avoid the ethical dilemma that he faced? Assume that the company president would have made it impossible for Charles to work in Atlanta in a comparable job.

3. What if the Securities and Exchange Commission discovered this fraud? Would Charles's boss get in trouble? Would Charles?

Answer 1

Charles did accounting fraud due to extensive pressure from CEO for showing the upside revenue. Due to this, he has voilated US GAAP & shown up the revenue which is not earned & issued fraud invoices to the other company.

To avoid this unethical dilemna, Charles should have report this issue with Board of Directors or may have resigned from the position as his boss did. Further, he could report this issue to respective government regulatory agency.

Securities & Exchange Commission has issued Sarbanes Oxley Act which has focused on misstatement in financial statement & financial statement should provide true & fair view. The act has made management responsible for Internal Controls on Financial reporting. In case of any fraud in accounting of revenue or misstatement, Management may face consequences such as Penalties, sentence to all the persons who are involved in this crime. Persons involved such as Charles, Holmes etc. will face penalties upto $ 5 Million & may sentenced upto 20 years in Jail. As per SOX act, if