Item 1

In the case below, the original source material is given along with a sample of student work. Determine the type of plagiarism by clicking the appropriate radio button.

Which of the following is true for the Student Version above?

Word-for-Word plagiarism

Paraphrasing plagiarism

This is not plagiarism

Hints

Item 2

In the case below, the original source material is given along with a sample of student work. Determine the type of plagiarism by clicking the appropriate radio button.

Which of the following is true for the Student Version above?

Word-for-Word plagiarism

Paraphrasing plagiarism

This is not plagiarism

Hints

Item 3

In the case below, the original source material is given along with a sample of student work. Determine the type of plagiarism by clicking the appropriate radio button.

Which of the following is true for the Student Version above?

Word-for-Word plagiarism

Paraphrasing plagiarism

This is not plagiarism

Hints

Item 4

In the case below, the original source material is given along with a sample of student work. Determine the type of plagiarism by clicking the appropriate radio button.

Which of the following is true for the Student Version above?

Word-for-Word plagiarism

Paraphrasing plagiarism

This is not plagiarism

Hints

Item 5

In the case below, the original source material is given along with a sample of student work. Determine the type of plagiarism by clicking the appropriate radio button.

Which of the following is true for the Student Version above?

Word-for-Word plagiarism

Paraphrasing plagiarism

This is not plagiarism

Hints

Item 6

In the case below, the original source material is given along with a sample of student work. Determine the type of plagiarism by clicking the appropriate radio button.

Which of the following is true for the Student Version above?

Word-for-Word plagiarism

Paraphrasing plagiarism

This is not plagiarism

Hints

Item 7

In the case below, the original source material is given along with a sample of student work. Determine the type of plagiarism by clicking the appropriate radio button.

Which of the following is true for the Student Version above?

Word-for-Word plagiarism

Paraphrasing plagiarism

This is not plagiarism

Hints

Item 8

In the case below, the original source material is given along with a sample of student work. Determine the type of plagiarism by clicking the appropriate radio button.

Which of the following is true for the Student Version above?

Word-for-Word plagiarism

Paraphrasing plagiarism

This is not plagiarism

Hints

Item 9

In the case below, the original source material is given along with a sample of student work. Determine the type of plagiarism by clicking the appropriate radio button.

Which of the following is true for the Student Version above?

Word-for-Word plagiarism

Paraphrasing plagiarism

This is not plagiarism

Hints

Item 10

In the case below, the original source material is given along with a sample of student work. Determine the type of plagiarism by clicking the appropriate radio button.

Which of the following is true for the Student Version above?

Word-for-Word plagiarism

Paraphrasing plagiarism

This is not plagiarism

Case Study: Your Star Salesperson Lied. Should He Get a Second Chance?

KANA’S HOME, THURSDAY NIGHT

Kana Kapoor rarely checked Facebook. As CEO of one of the largest pharmaceutical-marketing firms in Western India, he didn’t have time for social media. But right now, he needed to log on. He searched for the doctor’s name—Parasaran Srinivasan—and recognized the first picture that popped up. Just as he’d thought, they’d gone to university together in Mumbai. Looking at his old classmate’s page, he groaned. The pictures of Parasaran at a recent World Cup party confirmed that one of Novacib Labs’ top salespeople had falsified his sales report. Now he had to decide what to do about it.

NOVACIB HQ, THAT MORNING Surprising News

Everyone at Novacib knew Kana hated getting emails with that little red exclamation mark. So when he saw both the red mark and the word “URGENT” in his in-box, his stomach dropped. The email was from Armina Pillai, Novacib’s regional sales manager in the Mumbai office. She’d kept her message short: “Need your advice on a potential ethical breach.” Kana canceled his next meeting and called her mobile. “Tell me what’s going on,” he said when she picked up. “I’m afraid we have an issue with one of our sales reports,” Armina said carefully. “What kind of issue?” “It seems that Dave may have intentionally falsified some information about his customer calls.” “Dave?” Kana made no attempt to hide his surprise. Dave Madhav was one of Novacib’s best salespeople. He routinely exceeded his targets by 10% to 20% and had earned the company’s top commission prize three times in the past five years. And he was a generous colleague. He often took new salespeople under his wing, sharing sales tactics and handing off easy customers. There was no doubt that the company’s targets were ambitious. Sales reps were required to meet with a minimum of 10 physicians and four retail pharmacies a day, allocating that time according to the potential of the target: 50% to platinum-class customers, 30% to gold, and 20% to silver. The regional sales managers worked closely with the reps to coach and support them— 2 but Dave rarely needed Armina’s help. In fact, he often served as a mentor to his more junior colleagues. “Could there be some mistake?” Kana asked. “It’s possible. But I know how seriously you take ethical issues. I wanted to bring this to your attention right away.” Five years earlier, when Kana had taken the helm at Novacib Labs, its founder and outgoing CEO had given him a mandate: grow the company by 40% and ensure that it remains the market leader. New competitors were popping up every day, vying to capitalize on the explosive growth in the Indian pharma industry. Kana knew that to accomplish his goals, he needed to be laserfocused on strategy. And by all accounts, he’d been successful. During his tenure, the company’s portfolio had grown from 22 brands to 46, and from 10 sales territories to most of Western India. That success, he believed, rested on Novacib’s new positioning—to customers and employees— as “the ethical pharmaceutical-marketing company.” Amid growing concerns that similar firms were bribing customers or overstating products’ benefits, this stance distinguished Novacib. Kana and his leadership team had even changed the firm’s tagline from “Health for everyone” to “Health with integrity.” Behaving ethically became part of Novacib’s story, and all employees were encouraged to share it, especially during sales calls. And the tagline was more than a marketing slogan to Kana. He’d always prided himself on leading a principled life. Armina was absolutely right that he would be concerned about false reports. To protect its reputation, Novacib had a zero-tolerance policy for ethics violations. But would sacking Dave really be in the best interest of the firm, Kana couldn’t help but wonder? He had always made or exceeded his numbers—and boosted the performance of his colleagues as well. “Kana?” Armina asked. “I’m still here,” he said. “Tell me exactly what happened.” “Something Doesn’t Feel Right” Armina recounted what she’d discovered the evening before. “I was leaving the office last night,” she began, “when I got a text from Dave that said, Baby still sick. Need to give wife a reprieve. I’ll make up the visits next week. Of course, I felt for him. I’d been in his shoes. The baby is just a few weeks old, and neither he nor his wife have slept much. He’s still been hitting his quotas, but he looks exhausted. “I decided to stay at the office to finish up my reports in case I had to cover his sales calls. And as I was looking over his activity, one date stood out: June 21. That was the day Argentina lost to Croatia in the World Cup. 3 “I remember it well, because I had followed the match online. Dates don’t typically stick in my mind, but that day was depressingly memorable, not just because my team lost but also because I watched the game by myself. My family—like most of Mumbai—had skipped work to watch together. I hadn’t wanted to get behind, so I spent the day alone in the office. “I had spoken with Dave the morning of the game, and he mentioned that he was going to watch it. And yet his daily report listed the names of three doctors that he supposedly saw that afternoon. I texted him about the discrepancy—something like Sorry to bother you with baby sick. Can you resend your activity report for the week of June 18? Ten minutes later he emailed me the same information, so I texted again: Are you sure that’s accurate? He sent back a thumbs-up emoji.” She paused. “Go on,” Kana said grimly. “I’m not in the habit of tracking our salespeople’s whereabouts, especially in the case of Dave, who has always been a star performer.Normally, I’d give him the benefit of the doubt, but something didn’t feel right. I looked him up on Twitter and scrolled back to his tweets from June 21. He’d clearly been watching the game—at home. Then I tried one of the doctors on Dave’s report. Same thing: He’d been watching the game, too, not meeting with Dave. That’s when I started to panic.” Kana was starting to panic as well. Trust was essential to the company’s mission, and Dave’s actions were exactly the kind of thing that could undercut Novacib’s culture and reputation and breed resentment among employees. Kana recognized that Novacib was bound to encounter less-than-honest salespeople, but he was still having trouble believing that Dave would be the one to get into trouble first. At the same time, there was no denying his outsize contribution to the success of the firm—and how hard it would be to replace him. Shocked and angry, Kana wondered to himself, How could Dave have done this? NOVACIB HQ, FRIDAY MORNING Now What? The next day, Kana met with Bob Batra, Novacib’s HR director, in his office. They dialed in Armina on speakerphone. “This is bad,” Kana began. “Last night, I confirmed another doctor listed on the report whom Dave couldn’t have met with that afternoon.” “Armina and I had a conference call with him after she spoke with you,” Bob said. “We asked him about the report, and he said he had met with the doctors he listed—but not on June 21. He all but admitted that he lied. I’m not seeing any option other than letting him go.” “I don’t understand why he didn’t tell anyone he was struggling,” said Kana. “He’s the first one to help his colleagues out; people would have jumped at the chance to return the favor.” 4 “It’s definitely out of character for him,” Armina. “That’s why I feel strongly that we should issue a warning—especially with his being a new father. After all, he did meet with everyone he said he had. He wasn’t fabricating that.” “But he was altering the dates to meet his daily targets,” Bob countered, leaning toward the speakerphone. “That’s a serious breach, and we have to consider the broader impact of merely giving him a slap on the wrist.” She looked up at Kana. “When you brought me in after the rebranding, you asked me to help you build a culture of ethics and honesty. I’d be failing at my job if I advised you to let a transgression like this go. I recognize the value of Dave to our team, but our motto isn’t ‘Health with occasional integrity.’ We have to always do the right thing.”7 “I agree,” Kana said. “Integrity is our promise to every employee and every customer we interact with. If our people knew we tolerated this behavior after all the ethics training we’ve put them through, we’d look like hypocrites. We’d be hypocrites. And if this ever got out to our customers or the press, it could destroy our reputation.” “But how are we going to look to the rest of the team when we sack their beloved colleague with a newborn at home?” Armina asked. “And he’s such a strong performer! Think of the revenue hit we’d take. Are people actually going to care about three names listed for the wrong day on one weekly report?8 It’s not as if those call targets are tied to his compensation.” Small offenses may seem harmless, but research shows that they can breed problems by desensitizing our brains to the negative emotions related to unethical behavior. “It’s the principle of the thing,” Bob retorted. “And how do we know if this is the first time he’s fudged his reports? How can we trust him going forward? Are you going to check with his customers every week to confirm his reports?” Armina was silent on the line. Kana closed his eyes briefly. He knew she was right that the company would suffer if they fired Dave. He brought in over $250,000 a year, and he had built strong customer relationships that Novacib stood to lose if they sacked him. But Kana couldn’t shake his disappointment in Dave. Bob broke the silence. “You’ve addressed this issue repeatedly in our sales offsites,” she said. “You’ve stated in no uncertain terms that you’d rather salespeople not meet their targets than fake their numbers. If you don’t take action, you’ll damage your credibility. I know it’s painful, but I think it’s time to put your money where your mouth is.” NOVACIB HQ, FRIDAY AFTERNOON A Second Chance? “Thank you so much for the baby gift. Did you get the thank-you note my wife sent?” Dave’s voice sounded tentative on the phone, the small talk forced. 5 Kana had dreaded making the call, but before he reached a decision, he wanted to talk with Dave himself. “I did. Listen, Dave, I don’t want to make this anymore awkward than it needs to be. I just want to hear your side of the story.” Dave repeated what he’d told Armina: that he had met with those doctors, just on different dates. That he shouldn’t have submitted the false report. “I made a big mistake, and I’m sorry. I was feeling the pressure with the new baby. I knew I wasn’t going to hit my targets, and I didn’t want to disappoint anyone.” Kana hated to hear Dave sound so dejected. But part of him still felt betrayed. He reminded himself that Dave could easily find another job, especially since Novacib had no intention of going public with the circumstances if they let him go. But Dave would be devastated nonetheless. “We need accurate data to grow this business, and we’ve been very clear about our ethics policy,” Kana said. “I wish you’d talked to Armina about the pressure.” “I know, and I’d understand if you have to make an example of me. But please believe me that it has never happened before and won’t happen again. Don’t people deserve a second chance?”

Questions:

1. Should Kana fire Dave? Why? Why not? Explain in detail.

2. What options should Kana consider before firing Dave or overlooking the infraction?

3. Should Armina have kept a closer eye on her top performer?

4. What are the ethical implications of checking up on employees by tracking their activity on social media?

5. Do you think zero-tolerance policies result in bad outcomes? Do they force leaders to take action when a better solution could be found? Explain.

Keshk, Walied; Lu, Hung‐Yuan Richard; Mande, Vivek (2020). How have US banks adopted the Financial Accounting Standards Board's Level 3 fair value disclosure rules? Accounting & Finance 60, April Supplement S1, 693-727.

1. Read from the beginning until page 701 (hypothesis 3), and the conclusion on page 720. Summarize in your own words (about 100 words).

2. Explain the difference between Levels 1, 2, and 3. Keshk et al (2020) categorize levels 1,2 together, so you are free to do so but are not required. You may cite and reference other sources to answer this question.

3. If you were an auditor, which type of estimate requires more work to audit Levels 1,2 or Level 3? Explain.

Introduction:

This study examines how US banks have complied with the Financial Accounting Standards Board’s (FASB’s) requirements on Level 3 fair value disclosures. There has been a rise in the use of fair values in financial reporting during the past decade. The FASB’s Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, however, provides only principle-based guidance on how fair values should be measured using internal and external information. Under ASC 820, fair values of assets/liabilities are classified into Levels 1, 2 and 3 of the fair value hierarchy.

While Levels 1 and 2 fair values rely on market-based inputs, Level 3 measurements require model-based inputs. As such, Level 3 valuations are regarded as highly subjective and less reliable than other fair values. Firms are, therefore, required to provide more detailed information about the inputs used to calculate Level 3 fair values (ASC 820-10-50-8) and describe the processes in place for obtaining and validating these measurements (ASC 820-10-55-105). To increase their usefulness to investors, quantitative information about the valuation inputs must be presented in a tabular format (ASC 820-10-50-2bbb). In response to users’ concerns that the variability arising from these measurements can have a big impact on financial statements, firms must also disclose qualitatively the sensitivities of fair value measurements to changes in inputs (ASC 820-10-50-2 g). Additionally, to assist users, firms must prepare a table that reconciles the beginning balance of fair values to their ending balances by each level in the hierarchy (ASC 820-10-50-2c). When firms use third-party specialists for developing estimates of fair values, ASC 820 requires a description of the processes in place for evaluating and validating the valuation methodologies and the inputs provided by outside specialists (ASC 820-10-55-105). Compliance with the above rules, however, has proved to be a challenge for many firms (e.g. Ernst & Young 2012). The Securities and Exchange Commission (SEC) routinely issues comment letters pointing out instances of noncompliance and deficiencies in both fair value measurements and related disclosures.1 Significant deficiencies have also been found by the PCAOB in the audits of fair value measurements and disclosures (e.g. Acuitas, Inc., 2016). In many instances, these deficiencies occurred because effective internal controls were not in place in these firms (Ettredge et al., 2011; Acuitas, Inc., 2016). This study examines two research questions.2 First, we investigate the extent of noncompliance with Level 3 fair value disclosures provided by banks about their recurring fair value measurements. We focus on the banking industry because banks hold more financial instruments measured at fair values than do firms in most other industries (Lu and Mande, 2014a). Second, we test whether there are systematic differences between compliant and noncompliant banks. Because fair value measurements and disclosures are complex, we expect that compliance will be a challenge for smaller banks. The work of auditors is also paramount in ensuring that client firms are compliant with fair value disclosure rules. Therefore, we expect compliance in banks to increase as audit quality increases. As audit committees are responsible for the oversight of financial statements, we hypothesise that banks having effective audit committees will be more compliant with financial reporting rules. Finally, we predict that institutional investors, who often are the primary users of fair value information, will be more likely to monitor banks’ disclosure behaviour. Our results show that there is widespread noncompliance with the basic disclosure requirements of ASC 820. Over 40 percent of banks do not disclose the valuation inputs table. Additionally, a majority of banks do not fully discuss the processes used for validating fair value estimates, whether developed internally or obtained from third-party specialists. A majority of banks also do not provide disclosures related to the sensitivities of fair values to changes in valuation inputs. Our results also show that, in support of our hypotheses, noncompliant banks are smaller, have less effective audit committees and internal controls, are associated with lower audit quality and have lower levels of institutional monitoring. By documenting the extent of noncompliance, this study sheds light on the complexity and cost burden associated with fair value reporting mandates. Our results should help audit committees, auditors, regulators and other capital market participants identify more easily banks that are likely to be in violation of fair value reporting rules. We believe that our findings will also be useful to the FASB which is currently engaged in an ‘improvements project’ for simplifying fair value disclosure rules.3 Finally, our theory and findings should be relevant to regulators in the United States, Australia and other countries that have fair value disclosure requirements.4 The rest of this study is organised as follows. Section 2 reviews the literature on disclosure quality and develops our hypotheses. Section 3 presents our sample and empirical model, followed by a discussion of the results in Section 4. Section 5 then concludes the study. 2. Literature review and hypotheses development 2.1. Factors influencing disclosure quality Prior work has extensively examined factors influencing the quantity and type of voluntary disclosures provided by firms to investors. Studies show that firms voluntarily provide additional information when they desire access to capital markets. Firms providing superior disclosures reap benefits in the form of higher share prices, lower bid-ask spreads and lower costs of equity and debt capital (Welker, 1995; Botosan, 1997; Sengupta, 1998). Related literature finds that managers voluntarily disclose good or bad news in a strategic fashion. For example, Einhorn (2007) argues that managers strategically hide good news from their investors in order to lower stock prices prior to option grants. There have been, however, fewer studies examining factors affecting disclosures that are mandatory. Schwartz and Soo (1996) document widespread noncompliance with disclosures about auditor changes in Forms 8-K, especially when the departing auditor is a Non-Big N firm. Ettredge et al. (2011) find that noncompliance in disclosures about auditor changes is positively related to low quality corporate governance. Chen et al. (2015) document noncompliance with disclosure requirements relating to litigation losses mandated under ASC Topic 450, but when the firms are audited by an industry specialist, the authors find that compliance with GAAP rules increases. Research using Australian firms shows similar evidence of noncompliance with mandatory reporting requirements. Mayorga and Sidhu (2012) examine how the largest 20 Australian listed firms comply with disclosure requirements relating to major assumptions and estimation uncertainties associated with the valuation of a firm’s assets and liabilities. Their results show that firms do not fully comply with these requirements, thereby limiting the informativeness of the disclosures. Using a sample of large Australian firms, Gallery et al. (2008) document sizable variation in the quality of mandatory predisclosures about the effects of adopting International Financial Reporting Standards (AIFRS). Among 50 large Australian firms with goodwill on their books, Carlin and Finch (2010) find that more than 10 percent of them failed to provide the discount rate used for estimating the fair value of goodwill. Failure to provide mandatory disclosures can have significant negative consequences for firms in the form of penalties, lawsuits and stock price declines (Ettredge et al., 2011). Although we should not expect that firms will behave strategically in their noncompliance, there is some evidence that they do. Alexander et al. (2011), for example, find that firms do not disclose the effects of a new accounting standard under Staff Accounting Bulletin (SAB) 74 if the disclosures reveal bad news. Along the same lines, Ettredge et al. (2011) find that firms behave opportunistically with regard to disclosing bad news about auditor changes noting that it is ‘surprising that managers are willing to risk the disapproval of the SEC by partial compliance with 8-K regulation’. 2.2. Noncompliance with fair value disclosure requirements There is ample anecdotal evidence that firms face challenges in implementing fair value reporting requirements. Ernst & Young (EY) (2012), for example, document pervasive noncompliance with fair value disclosures concerning: presentation of quantitative Level 3 inputs, disclosures of those inputs and valuation techniques, levels of disaggregation at which fair value information is presented and inputs developed by third parties. In its study, EY surveys Level 3 fair value disclosures of 60 companies in 2012. However, the small size of the sample (only 14 banks are included) limits their study’s usefulness. EY also does not examine what firm characteristics are associated with fair value noncompliance. SEC comment letters also provide evidence of noncompliance with fair value disclosure rules. The SEC’s focus has mainly been on disclosures about Level 3 inputs mandated by ASU 2011-04 because of the high degree of judgment required from management in developing these inputs. The recent comment letters have requested that companies increase ‘granularity and transparency’ of disclosures about Level 3 inputs and provide additional information where the disclosures are incomplete or omitted.5 Additionally, the role of auditors in clients’ noncompliance with fair value rules has come under PCAOB scrutiny. In its inspections, the PCAOB has found that auditors routinely fail to adequately test clients’ controls around fair value disclosures and measurements, fail to identify weaknesses when qualified personnel are not used in the valuations, place too much reliance on third-party work and fail to adequately test the classification in the fair value hierarchy.6 There have only been a few academic studies examining noncompliance with fair value rules. Lu and Mande (2014a) examine banks’ compliance with one requirement of the FASB’s ASU 2010-06–Improving Disclosures about Fair Value Measurements. Prior to ASU 2010-06, firms were allowed to present fair value information in the notes by category of investments. ASU 2010-06, however, requires presentation by class of investments which involves a finer partitioning of fair value information.7 Using data from the first quarter of 2010, Lu and Mande report that 23 percent of the banks in their sample failed to provide fair value information disaggregated by class of investment. In a related study, Lu and Mande (2014b) find that fair value information is more value relevant when it is disaggregated by class of investment. In contrast to Lu and Mande, we mainly examine banks’ compliance with Level 3 fair value disclosure requirements included in the FASB’s ASU 2011- 04–Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. Disclosures mandated by ASU 2011- 04 are significantly more complex than those mandated by ASU 2010-06 (see Appendix I for a comparison). Compliance with ASU 2010-06 in Lu and Mande’s study, only required firms to present information that was readily available to them, albeit in a ‘finer’ fashion. Not surprisingly, within a year of ASU 2010-06 going into effect, virtually all banks were fully compliant with the requirement to disaggregate fair values.8 Therefore, Lu and Mande (2014a) document that there was only initial noncompliance with one of the requirements of ASU 2010-06. The reporting requirements of ASU 2011-04, however, are significantly more onerous for firms. Not only does it require significant changes in how data are organised (e.g. presentation in tables), but firms are tasked with the collection of new data (e.g. information about valuation inputs from third parties) and are required to perform new analyses (e.g. sensitivity of changes in fair values to changes in inputs).

Conclusion:

Our study examines compliance with Level 3 fair value disclosures provided by banks about their recurring measurements of financial instruments. Level 3 valuations are considered to be the most subjective and complex fair value measurements provided by firms on their financial statements. To assist users, the FASB, therefore, requires firms to provide detailed information about inputs and the validation of the fair value measurements. Furthermore, all quantitative information about Level 3 fair value measurements must be presented in a tabular format. The contribution of our study is twofold. First, we document the extent of noncompliance with fair value disclosure rules. Second, we study whether noncompliant banks are smaller and associated with lower levels of monitoring. Our results show that banks are compliant in providing fair values by classes of investments. However, there is widespread noncompliance with other basic fair value disclosure rules. Over 40 percent of banks do not provide an ‘inputs’ table while a majority of banks do not fully discuss the sensitivity of fair value estimates or how these estimates, whether developed internally or through third party specialists, are validated. These findings should concern the FASB because they show the presence of noncompliance with ‘first order’ requirements of ASC 820. We also noticed anecdotally other forms of noncompliance with regard to the information presented in the tables. The rates of noncompliance, therefore, are higher than those documented in this study. We also find that smaller banks face greater challenges in complying with fair value disclosure rules. Firms that have ineffective internal controls and lower levels of institutional monitoring are also less compliant. Finally, this study shows, albeit weakly, that effective audit committees and higher audit quality are associated with greater compliance. Our results should be of use to the SEC and PCAOB who have a great interest in ensuring compliance with the requirements of ASC 820. Our study should also benefit the FASB and other standard setters as they continue their work on improving the quality of fair value disclosures provided to investors.

Pain “Pain,” an excerpt from the book Reaching Up for Manhood, draws on the writer’s training and experience as a psychologist. He uses the narrative to explain the power of memory in our lives, especially memory of painful experiences. His particular focus is on boys and on the ways, they are taught to repress the wounds caused by painful experiences. Nonetheless, it should be easy for readers to apply his insights to the experiences of girls.

1. Boys are taught to suffer their wounds in silence. To pretend that it doesn’t hurt, outside or inside. So many of them carry the scars of childhood into adulthood, never having come to grips with the pain, the anger, the fear. And that pain can change boys and bring doubts into their lives, though more often than not they have no idea where those doubts come from. Pain can make you afraid to love or cause you to doubt the safety of the ground you walk on. I know from my own experience that some pain changes us forever.

2. It all started because there was no grass. Actually, there was grass, you just couldn’t walk on it.

3. In the late fifties and early sixties, the projects were places people moved to get away from tenement buildings like mine. We couldn’t move into the projects because my mother was a single parent. Today most projects are crammed full of single parents, but when I was a child your application for the projects was automatically rejected if that was your situation. The projects were places for people on the way up. They had elevators, they were well maintained, and they had grass surrounding them. Grass like we had never seen before. The kind of grass that was like walking on carpet. Grass that yelled out to little girls and boys to run and tumble and do cartwheels and roll around on it. There was just one problem, it was off limits to people. All the projects had signs that said “Keep Off the Grass.” And there were men keeping their eyes open for children who dared even think of crossing the single-link chain that enclosed it. The projects didn’t literally have the only grass we could find in the Bronx. Crotona Park, Pelham Bay Park, and Van Cortland Park were available to us. But the grass in those parks was a sparse covering for dirt, rocks, and twigs. You would never think about rolling around in that grass, because if you did you’d likely be rolling in dog excrement or over a hard rock.

4. There was one other place where we found grass in our neighborhood. Real grass. Lawn-like grass. It was in the side yard of a small church that was on the corner of Union Avenue and Home Street. The church was small and only open on Sundays. The yard and its precious grass were enclosed by a four-foot-high fence. We were not allowed in the yard by the pastor of the church.

5. Occasionally we would sneak in to retrieve a small pink Spaulding ball that had gone off course during a game of stickball or punch ball, but if we were seen climbing the fence there would be a scene, with screams, yells, and threats to tell our parents. So although we often looked at that soft grass with longing, the churchyard was off limits.

6. It would have stayed off limits if it had not been for football. Football came into my life one fall when I was nine years old, and I played it every fall for the rest of my childhood and adolescence. But football in the inner city looked very different than football played other places. The sewer manhole covers were the end zones. Anywhere in the street was legal playing territory, but not the sidewalk. There could be no tackling on pavement, so the game was called two-hand touch. If you touched an opponent with both hands, play had to stop. The quarterback called colorful plays: “Okay now. David, you go right in front of the blue Chevy. I’m gonna fake it to you. Geoff, see the black Ford on the right? No, don’t look, stupid—they’re gonna know our play. You go there, stop, then cross over toward William’s stoop. I’ll look for you short. Richard, go to the first sewer and turn around and stop. I’ll pump it to you, go long, Geoff, you hike on three. Ready! Break!”

7. All we needed was grass. All our eyes were drawn to the churchyard. A decision had to be made. Rory was the first to bring it up. “We should sneak into the churchyard and play tackle.”

8. We all walked over to Home Street and, out of sight of front windows, climbed over the fence and walked onto the grass. A thick carpet of grass that felt like falling on a mattress. We were in heaven.

9. Football in the churchyard was everything we had imagined. We could finally block and tackle and not worry about falling on the hard concrete or asphalt streets. We didn’t have to worry about cars coming down the block the way we did when we played two-hand touch. And because we were able to tackle, we could have running plays. We loved it. We played for hours on end.

10. There was one problem with our football field, which was about thirty yards long and fifteen yards wide: at the far end there was a built-in barbecue pit, right in the middle of the end zone. If we were running with the football, or going out for a pass, we had to avoid the barbecue pit with its metal rods along the top, set into its concrete sides. We knew that no matter what you were doing when in that area of the yard, you had to keep one eye on the barbecue pit. To run into its concrete sides—or, even worse, the metal bars—would be very painful and dangerous.

11. I was fast and crafty. I loved to play split end on the offense. I could fake out the other kids and get free to catch the ball. I had one problem, though—I hadn’t mastered catching a football thrown over my head. To do this you have to lean your head back and watch as the football descends into your hands. Keep your eye on the ball, that’s the trick to catching one over the shoulder. We all wanted to go deep for “the bomb”—a ball thrown as far as possible, where a receiver’s job is to run full speed and catch it without-stretched hands. It took me forever to learn to concentrate on the football, with my head back as far as it would go, while running full speed. But finally, I mastered it. I was now a truly dangerous receiver. If you played too far away from me I could catch the ball short, and if you came too close I could run right by the slower boys and catch the bomb.

12. The move I did on Ned was picture perfect. I ran ten yards, turned around, and faced Walter. He pumped the ball to me. I felt Ned take a step forward, going for the fake as I turned and ran right by him. Walter launched the bomb. As the football left his hand I stopped looking over my shoulder at him and started my sprint to the end zone. After running ten yards I tilted my head back and looked up at the bright blue fall sky. Nothing. I looked forward again and ran harder, then looked up again. There it was, the brown leather football falling in a perfect arc toward the earth, toward where I would be in three seconds, toward the winning touchdown.

13. And then pain. The bar of the barbecue pit caught me in midstride in the middle of my shin. I went down in a flurry of ashes, legs and arms flying every which way. The pain was all-enveloping. I grabbed my leg above and below where it had hit; I couldn’t bear to touch the place where it had slammed into the bar. The pain was too much. I lay flat on the ground, trying to cry out. I could only make a humming sound deep in the back of my throat. My friends gathered around and I tried to act like a big boy, the way I had been taught. I tried not to cry. Then the pain consumed me and I couldn’t see any of my friends anymore. I howled and then cried and then howled some more. The boys saw the blood seeping through my dungarees and my brother John said, “Let me see. Be still. Let me see.” He rolled my pants leg up to my knee to look at the damage. All the other boys who had been playing or watching were in a circle around me. They all grimaced and turned away. I knew it was bad then, and I howled louder.

14. Catching the metal bar in full stride with my shin had crushed a quarter-sized hole in my leg. The skin was missing and even to this day I can feel the indentation in my shinbone where the bar gouged out a small piece of bone. I was off my feet for a few days and it took about two weeks for my shin to heal completely. Still, I was at the age where sports and friends meant everything to me. I couldn’t wait to play football in the churchyard again, but I was a much more cautious receiver than before.

15. Several years later, when I finished the ninth grade at a junior high school in the South Bronx and was preparing to go to high school, I knew that my life had reached a critical juncture. My high school prospects were grim. I didn’t pass the test to get into the Bronx High School of Science (I was more interested in girls than prep work), so my choices were either Morris High School or Clinton High School. Both of these were poor academically and suffered from a high incidence of violence. I asked my mother if I could stay with my grandparents in the house they had just built in Wyandanch, a quiet, mostly African-American town on Long Island. She agreed, and they agreed, so I went there for my three years of high school.

16. That first year I went out for the junior varsity football team at Wyandanch High and played football as a receiver. I was a good receiver. The years of faking out kids on the narrow streets of the Bronx made me so deceptive that I couldn’t be covered in the wide-open area of a real football field. But I had one problem—I couldn’t catch the bomb. My coach would scream at me after the ball had slipped through my fingers or bounced off my hands. “Geoff! What’s the matter with you? Concentrate, dang it! Concentrate!” I couldn’t. No matter how I tried to focus on the ball coming down out of the sky, at the last minute I would have to look down. To make sure the ground wasn’t playing tricks on me. No hidden booby traps. What happened in the churchyard would flash into my mind and even though I knew I was in a wide-open field, I’d have to glance down at the ground. I never made it as a receiver in high school. I finished my career as quarterback. Better to be looking at your opponent, knowing he wanted to tackle you, sometimes even getting hit without seeing it coming, but at least being aware of that possibility. Never again falling into the trap of thinking you were safe, running free, only you and the sky and a brown leather ball dropping from it.

17. Boys are conditioned not to let on that it hurts, never to say, “I’m still scared.” I’ve written here only about physical trauma, but every day in my work I deal with boys undergoing almost unthinkable mental trauma from violence or drug abuse in the home or carrying emotional scars from physical abuse or unloving parents. I have come to see that in teaching boys to deny their own pain we inadvertently teach them to deny the pain of others. I believe this is one of the reasons so many men become physically abusive to those they supposedly love. Pain suffered early in life often becomes the wellspring from which rage and anger flow, emotions that can come flooding over the banks of restraint and reason, often drowning those unlucky enough to get caught in their way. We have done our boys an injustice by not helping them to acknowledge their pain. We must remember to tell them “I know it hurts. Come let me hold you. I’ll hold you until it stops. And if you find out that the hurt comes back, I’ll hold you again. I’ll hold you until you’re healed.”

18. Boys are taught by coaches to play with pain. They are told by parents that they shouldn’t cry. They watch their heroes on the big screen getting punched and kicked and shot, and while these heroes might groan and yell, they never cry. And even some of us who should know better don’t go out of our way to make sure our boys know about our pain and tears, and how we have healed ourselves. By sharing this we can give boys models for their own healing and recovery.

19. Even after I was grown I believed that ignoring pain was part of learning to be a man, that I could get over hurt by simply willing it away. I had forgotten that when I was young I couldn’t run in an open field without looking down, that with no one to talk to me about healing, I spent too many years unable to trust the ground beneath my feet.

EXPOSITORY TECHNIQUES

1. Which paragraphs in the essay are devoted primarily to retelling events? Which focus on analyzing the events and generalizing about behavior?

2. Why do you think the writer waited until the end of the essay to offer an extended discussion of the psychological consequences of painful events? Where else in the essay might he have undertaken such an explanation?

3. Discuss the strategies the writer employs to create transitions between the paragraphs in the following pairs: 1 and 2, 5 and 6, 6 and 7, 12 and 13, and 17 and 18.

1.What is qualitative abnormality?

a. abnormal symptoms for which statistical norms are established     b. a major deviation from key social norms    

c. a consistent state of frustration and helplessness    d. symptoms diagnosed in women  e. symptoms of high quality

2. In the abbreviation, DSM, what does the “SM”stand for?

            a. scientific method      b. solo-micro      c. statistical  manual d. serious manic    e.  statistical manic-depressive

3. Your 22-year-old female patient displays symptoms of persistent anxiety for two weeks. As a clinical psychologist, how would you diagnose these symptoms?

a. Generalized Anxiety Disorder  b.  no diagnosis: these symptoms must be present for a longer period

c. phobia of the Othertype     d. hypomanic episode with panic   e. Phobia with anxiety symptoms

4. How many editions of the Diagnostic Statistical Manual of Mental Disorders have been released?

a.  3      b. 4      c.  5      d.  6       e. 7

5. A newly arrived male patient is extremely reluctant to undergo a simple procedure that requires a small incision (cut) on his neck; he fainted when the nurse showed him a digital picture of the proposed operation. If you know that this patient has a long history of phobic reactions, what type of phobia are you dealing with right now?

            a. neck-and-face phobia    b. nurse/doctor phobia  c. irresponsible pain fear

d. situational/medical/operational phobia  e. blood/injection/injury phobia

6. Why have there been several editions of DSM?

a. because the law requires the change every 3 years      b. because of new research and new evidence about disorders      c. because the law requires the change every 5 years      d. because different sates use different editions       

e. because some editions are designed for psychiatrists and others are for psychologists

7.Which three diagnostic categories are no longer in use in the United States?

a. phobia, mania, and panic disorder   b. hysteria, mania, and panic disorder     c. hysteria, madness, and neurosis    

d. obsessive-compulsive disorder, phobia, and madness   e. neurosis, phobia, and panic disorder

8.  What is the difference between obsession and compulsions?

a. there is no difference according to DSM   

b.  obsessions are actions, compulsions are thoughts    

c. obsessions are hallucinations, compulsions are delusions    

d. compulsions are hallucinations, obsessions are delusions  

e. obsessions are ideas, compulsions are behaviors  

9.  Which of these categories does not belong to the known types of OCD?

            a. Cheaters      b. Checkers   c. Doubters    d. Hoarders       e. Counters

10. People with this type of OCD accumulate enormous amount of things of relatively low value they do not need to have and will likely never use.

a. storage people   b. accumulators    c. hoarders   d. value jets   e. keepers

11. One hundred years ago, the symptom “neurasthenia” meant that:

a. a patient had madness    b. a patient developed alcohol addiction         c.  a patient was healthy    

d. a patient had a brain injury         e.  a patient had a weak nervous system

12. Generalized Anxiety Disorder typically occurs as a response to a:

a. pregnancy  b. manic episode    c. major depressive episode   d. weather change   e. life stressor

13. Three major criteria to diagnose mental illness: abnormality, dysfunction and……

a. depression     b. illness     c. severe dysfunction   d. emotional problem      e. distress   

14. There is a category of phobias called “Other”. What does this category represent?

a. phobias hat are associated with fear of heights    b. phobias that are mild and do not require medical attention

c. phobias that do not fit in the basic four categories  d.  Phobias causing depression  

e. phobias in other members of your family

15. Phobias of the animal type are most common in this group:

a. children   b. adolescents (16-18)  c. young adults  (20-25)  d. adults (40-55)   e. mature adults (60-)

16. What is the clinical-psychological difference between anxiety and fear?

a. fear is common in women, anxiety is common in men   

b. fear is common in men, anxiety is common in women   

c. fear is specific, anxiety is free-floating    

d. fear refers to the future, anxiety refers to the past    

e. fear is an emotion, anxiety is a form of depression

17. What is quantitative abnormality?

a. symptoms diagnosed mostly in women  

b. a state of unreasonable joy    

c. a major deviation from cultural norms    

d. symptoms diagnosed mostly in men   e. abnormal symptoms for which statistical norms are established

18. Certain symptoms of schizophrenia are called “negative” Why?

a. because these symptoms stand for slowing down and withdrawing     b. because these symptoms were described negatively in the media  c.  because if you call them “positive,” some patients could feel bad    d.  because these symptoms are associated with violence  e. because they are viewed as not good for patients’ future

19.Delusion of grandeurwas discussed in class. What is this delusion about?

a. it is another name for hallucinations    b. beliefs about own superpowers and high social status   c. beliefs about being an unimportant person   d. beliefs in being strong and healthy        e. beliefs in being connected with the dead

20. The most common type of hallucinations in patients with symptoms of schizophrenia is:

a.  seeing monsters and demons   b. hearing voices   c. feeling cold    d.  hearing music    e. abdominal pain

21. Why do many people suffering from PTSD start using substances such as alcohol or cocaine?

a. because some doctors prescribe them        b. because people who suffer from PTSD are primarily drug users  

c. because people believe they do not have other means to reduce their painful symptoms      d. because they can be used to treat sleep problems      e. because they have hallucinations and delusions

22. Consider a case: an elderly female patient for many years claims she has multiple physical symptoms; in reality, however, she cannot be diagnosed with any specific illness. What will be the name for her condition?

a. pain disorder  b. dissociative  future   c. Attention deficit disorder   d. somatization disorder     e. dissociative fugue   

23. What do most medical professionals think of Multiple Personality Disorder?

a. most consider it valid and serious disorder       b. most of them deny its existence   c. most specialists say they have never heard of this disorder   d. most consider this disorder a form of depressive disorder      e. some agree, some disagree that this is a valid disorder   

24.Ralf is a 9 year-old boy; he was scared by sound of a thunderstorm in 2015. Nobody was injured and no destruction took place. How likely it is that Ralf, because of this incident, would develop PTSD later in life?

a. very likely    b.  somewhat likely    c. very unlikely   

d. almost certainly, he has already developed a stress-related disorder

25.Delusion of communicationwas discussed in class. What is it?

a. it is another name for hallucinations    b. beliefs that all journalists are demons    c. beliefs in being a communication major      d. beliefs in being connected to other people, God, or the Devil   e. beliefs about knowing many languages

26. Echolalia or echopraxia are symptoms that are common features of:

a.   PTSD   b. Autism    c.  Bipolar Disorder    d. delusion of reference   e. catatonia

27. Why don’tmost professionals such as firefighters, police officers,  and doctors working in emergency rooms develop symptoms of PTSD?  a. because they take medication in the morning   b. because they take special medication once a week c. because they are on therapy  d. because they typically don’t experience intense fear when witnessing traumas   e. because they have a genetic resistance to stress and fear

28. Symptoms such as failure to make eye contact, social withdrawal, lack of spoken language, and repetitive behaviors are among major symptoms of which disorder?

a.  PTSD   b. ADD   c.  ADHD  d. Tourette’s Disorder    e. Autistic Disorder

29.What is the third group of symptoms typically identified in Attention Deficit/Hyperactivity Disorder? (The first one is Inattention, the second is Hyperactivity)

a.  excessive anxiety    b. hallucinations    c. motor tics     d. obsessions and compulsions   e. impulsivity

30. A person witnesses a traumatic event but does notdevelop symptoms of PTSD.  How common is this?

a. this is very unusual: the person must develop a stress disorder   

b. this is unusual: most people develop a stress disorder under these circumstances  

c. this is common: most people in such circumstances don’t develop a stress disorder   

d.  this is common but only in men    e. women almost always develop a stress disorder in such circumstances  

31. People who develop schizophrenia fall under the rule of “three thirds”. What is this rule?

a. the rule explains that why women are not diagnosed with this illness     b.  the rule  explains the negative symptoms of this illness    c. the rule  explains the positive symptoms of this illness   d. the rule predicts how many people would likely to recover from illness   e. the rule explains that why children are not diagnosed with this illness  

32.On this stage of the addiction process, without the substance, the person suffers from pains, anxiety, depression, agitation, sleepiness, anger, or nausea. What is the name of this stage?

a. withdrawal   b. panic attack    c. tolerance   d. degradation    e. shame

33. Which is the most common, typical cause of stress?

a. personal health problems    b. lack of money    c. devotion to a cause   d. cultural adjustment   e. daily hassles

34.Delusion of reference was discussed in class. What is it?

a. beliefs that a person carries a special and very important knowledge of global significance  

b. beliefs that the government wants to kill this person   

c. beliefs about the earth being melted from within as a result of global warming

d. beliefs about the ability to predict scores in football and other sports     

e. beliefs about knowing many languages

35. Attention Deficit Disorder is different from ADHD. What is the difference?     

a. no inattention symptoms in ADHD    b. no positive symptoms in ADD  c. no negative symptoms in ADD   

d. no delusions in ADD   e. no hyperactivity symptoms in ADD

36.Conduct disorder is typically diagnosed in:

a.  women only   b. men only   c. criminals     d. 60-70 year olds           e. children and adolescents      

37. What is the probability that a 44-year old woman develops schizophrenia if she has not have symptoms before?

a.  about 30%    b. about 10%   c. about 5%   d. about 2%   e.  about zero

38. A 14-year-old girl has the following symptoms present for more than 3 years: physically cruel to people, deliberately destroyed others' property, often lies to obtain goods or favors, and has run away from home overnight 5 times. What would be your likely diagnosis?

a. manic episode   b. conduct disorder    c. fighting complex     d. gender violent syndrome    e. power disorder

39. Is it accurate to say that every person with a serious mental illness is insane?  Find the best answer.

a. yes, accurate: any serious mental illness is insanity   

b. yes, accurate but only for schizophrenia, which is the other word for insanity    

c. accurate only for personality disorders, which cause insanity     

d. not accurate because insanity stands for a person’s violent behavior

e. not accurate: insanity only means that a person is not legally responsible for his or her action    

40. Your patient complains about persistent preoccupation with fears of having a serious disease; you learn, however, that this patient’s belief is based on the person’s misinterpretation of her physical symptoms. What would be your diagnosis?

a. hypocrisy        b. hypochondriasis       c. conversion disorder    d. dissociative fugue    e. pain disorder

41. A few decades ago many doctors combined cold baths, laxatives, and bloodletting to treat their mental patients. What was the perceived goal of such treatments?      

a. to demoralize the patient        b. to clean the body of harmful elements      c. to research the placebo effect    

d. to help patient lose weight     e. to punish patients for their misbehavior

42. According to lectures, treating and preventing of suicidal behaviors should be based on at least three general strategies: reducing the intense psychological pain and suffering; expanding the constricted view by helping the individual to see options. What is the third strategy?

a. giving a person money to pay the bills       b. invite a relative from another town or city to come and live with this person   

c. encouraging a person to pull back from a new self-destructive act     d. to suggest a person to change eating habits   

e. encouraging a person to get a job

43.  As a therapist, you explain to your client that her worries are irrational and she must adopt a more realistic view of her life. What kind of a therapy are you using in this case?                        

a. behavioral    b. systematic relaxation    c.  electro-convulsive    d. biomedical      e. cognitive    

44.Dr. Drew Pinsky developed a multi-step program to fight addictive behavior? His therapy is:

a. a combination of cognitive and behavior therapy    

b. a kind of psychoanalytic therapy

c. a type of electroconvulsive treatment

d. a combination of psychoanalysis and electroconvulsive treatment

e. a combination of psychoanalysis and spiritual healing

45. What is the stigma of mental illness?

a. a type of behavioral therapy    b.  a negative view of psychological disorders

c.  a gender bias in diagnosing mental illness d.  a type of cognitive therapy

e. any reserac0based knowledge of mental illness

46.The famous “drug revolution” in treatment of mental illness took place in the:

a. 2001-2003     b. 1990s    c. 1980s   d. 1970s    e. 1960s

47. “The use of spiritual healingcould help your patients in their better understanding of their lives, the importance of positive thinking, hope, compassion, and good will.Which therapeutic approach does this statement reflect?”      a. behavior    b. cognitive    c. psychoanalytic    d. biomedical   e. none of the above

48. What psychotherapy?

a. any form of medical treatment   b. a type of verbal interaction between a clinician and his or her client

c. a form of medical care to treat most violent patients  d. a form of medical care to treat emotional problems

e. a type of treatment involving prescribed drugs

49. The Phineas Cage case linked psychological dysfunction with:

a. poverty b. brain injury    c. abuse     d. immigration     e. genetic factors

50. According to psychoanalysis, what triggers initial anxiety in people with serious emotional problems?

a. pregnancy in women and maturity in boys    

b. losing money or a job   

c. a traumatic event during childhood     

d. traumatic event during adulthood   

e. inability to find a good, reliable friend

For the following case study address the questions in details (no bullets)

1- What is the nature of the product quality problem faced by Mattel?

2- What organizational practices of Mattel contributed to the problem?

3 What can Mattel do to enhance product quality?

4- Which toys should be recalled? What should the recall strategy be?

MATTEL AND THE TOY RECALLS (A)1

Jay Leno aptly reflected the mood of U.S. consumers during the summer of 2007. Many Chinese-made goods, such as pet food, toothpaste, seafood, and tires, had been recalled in recent weeks. These recalls began lo severely erode the confidence of U.S. consumers in Chinese-made goods. On July 30, 2007, the senior executive team of Mattel, under the leadership of Bob Eckert, CEO, received reports that the surface paint on the Sarge Cars made in China contained lead in excess of U.S. federal regulations .2 It was certainly not good news for Mattel, which was about to recall 967,000 Chinese-made children's character toys, such as Dora, Elmo, and Big Bird, because of excess lead in the paint. Not surprisingly, the decision ahead was not only about whether to recall the Sarge Cars and other toys that might be unsafe, but also how to deal with the recall situation .

TOY INDUSTRY - OVERVIEW

The global toy market was estimated to be a $71 billion business in 2007 -an increase of about six per cent over the previous year .3 About 36 per cent of the global market was concentrated in North America (about $24 billion), but annual sales in this region were growing at a slower pace -about one per cent. European markets accounted for about 30 per cent of the global toy sales and were growing at about five per cent each year. ln contrast, the markets in Asia grew at 12 per cent in 2006, and were expected to grow by 25 per cent in 2007.4 A large part of this growth was expected to occur in China and India, whose burgeoning middle-classes were thriving on the double-digit economic growth in their countries.

The toy industry in the United States had a large nu mber of players . About 880 companies operated in the dolls, toys, and games manufacturing industry in 2002. This figure was about 10 per cent less than the 1 ,019 companies that operated in 1997. Approximately 70 per cent of the toy companies employed less than 20 persons.5 The industry was dominated by a few key players such as Mattel, Hasbro, RC2, JAAKS Pacific, Marvel, and Lego. The industry leaders were Mattel and Hasbro, whose combined sales in 2006 were about US$8 .7 billion . The sales of many other major players were under a billion dollars. Exhibit 1 contains key financial data of some major U.S. toy makers.

Big retailers like Wal -Mart and Target had become major players in the U.S. toy market. They not only sold the products of other toy companies such as Mallet, Hasbro, and Lego, but also sourced toys directly from China. These toys were often sold u nder their own brand names . For example, Wal -Mart sold toys under its Kid-Connection brand while Target sold toys under its PlayWonder brand.6 It was estimated that Wal -Mart accounted for about 25 per cent of the toy sales in the United States.7 As a result of the entry of big-box retailers in the toy industry, specialty toy retailers such as Toys'R'Us had steadily lost market share.8 The top five retailers sold about 60 per cent of all the toys sold in the United States.9

Toy markets i n the United States were categorized into multiple segments, such as Action Figures & Accessories, Arts & Crafts, Building Sets, Dolls, Games/Puzzles, f nfant/Preschool Toys, Youth Electronics, Outdoor & Sports Toys, and Plush Vehicles. Of these, the infant/preschool toy segment was the largest, followed by outdoor and sport toys, and dolls. These segments had largely remained stagnant over the years. As a result of kids getting old younger (KOOY), the only segment with noticeable growth was youth electronics. By contrast, video games tha.t were outside the traditional toy industry ha.d been experiencing remarkable growth. For segment-wise sales of toys in the United States, see Exhibit 2.

While the major markets for toys existed in the United States and Europe, production was concentrated in Asia, primarily China.. About 60 per cent of the toys sold in the world were made in China.. More than I 0,500 toy makers operated in China. 10 These companies typically had contacts with large Western toy companies. The toy companies in China formed a complex web of supply chains, with contractors themselves sub-contracting production of components.,and often, entire products to various companies .

TOY PRODUCTION IN CHINA

Over the years, U.S. toy companies shifted their production overseas and focused their domestic operations on product design, marketi ng, research and development, and other high-value activities . As a result, employment i.n the domestic toy industry declined from 42,300 workers in 1993 to 17,400 workers in 2005, while toy imports increa.sed.11 Approximately l 0 per cent of the demand for toys in the U .S. market was met by domestic production , while the rest was met through imports, primarily from China (see Exhibit 3).12

Chinese toy imports accounted for a full 86 per cent of toy imports to the United States in 2006, up dramatically from 41 per cent in 1992. The rise of China came at the expense of other toy exporting countries, whose combined share of toy imports to the United States plummeted from 59 per cent to 14 per cent during the same period. For instance, Japan remained a strong exporter of toys to the United States until a substantial drop around 2001. Despite its prox·imity to the United States, Mexico had not been able to sustain the up-tick it experienced in 2002. Further, Taiwan and Hong Kong toy exports had both been in decline for over a decade.

China's rising share of U.S. toy imports, and more generally, China 's position in the global toy industry, can be attributed to the lower cost business environment in China. China had attracted tremendous foreign direct investment and outsourcing of manufacturing operations . While analysts have often pointed to the phenomenal economic growth in China, they have also noted the resultant pressure on the physical, technical, and human resource infrastructures .13 These pressures. some analysts argue, have resulted in the Chi.nese manufacturers compromising on the product safety.

According to American regulators, tainted pet food imported from China was responsible for deaths of, or injuries to, about 4,000 cats and dogs. As a result, regulators initiated the biggest pet food recall in U.S. history. This was followed by worldwide recalls of Chinese toothpaste laced with anti-freeze called diethylene glycol, which was found to be responsible for nearly 200 deaths in Haiti and Panama. Shortly thereafter, Chinese-made tires were linked to two deaths in an accident in the United States and were recalled. The tires lacked a safety feature that prevented tire treads from splitting and falling apart.14 The spate of recalls of Chinese-made goods began to erode consumer confidence in products made in China .

TOY SAFETY

The safety of consumer goods in the United States is managed by four federal agencies: (i) the Food and Drug Administration (FDA) has jurisdiction over foods, drugs and cosmetics, (ii) the Department of Transportation oversees the safety of cars, trucks, motorcycles, and their accessories, such as tires and car seats, (iii) the Department of Treasury has jurisdiction over alcohol, tobacco and firearms, and (iv) the U.S. Consumer Product Safety Commission (CPSC) has jurisdiction over about 15,000 types of consumer products, from microwave ovens to cribs to lawn mowers .15

The safety of toys and other children's products falls within the jurisdiction of CPSC, which was created in 1972 by Congress in the Consumer Product Safety Act to "protect the public against unreasonable risks of injuries and deaths associated with consumer products ."In 2007, the CPSC had an operating budget of $66 million and a staff of 393 full-time equivalent employees . Its strategic goals for the year were to reduce deaths and injuries by fire hazards , carbon monoxide poisoning hazard, and hazards from children 's products .16 According to CPSC, 22 toy-related deaths and an estimated 220,500 toy-related injuries occurred in 2006.17 Based on its analysis, CPSC identified the Top Five Hidden Home Hazards. These hazards were listed 011 the CPSC website to make consumers aware of the hazards and avoid injuries due to them . In 2007, CPSC listed the following as the top hazards: magnets, recalled products , tip-overs, windows and covering, pool and spa drains.

The CPSC collects information about product safety issues from sources such as hospitals. doctors, newspaper reports, industry reports, consumer complaints, investigations conducted by its staff, and reports from companies. When a company becomes aware of hazards associated with the products it sold, it is required by law to immediately inform the CPSC. Based on the infomiation it received , CPSC worked in coordination with the companies involved to recall the hazardous products from the market. Exhibit 4 presents the number of toy recalls made by CPSC since 1988. Not surprisingly, the majority of recalls in recent years involved toys made in China. See Exhibit S for a list of the toys recalled in the United States since the beginning of 2007 . All the toys recalled, with one exception, were made in China. Seven of the recalls were a result of excess lead in the surface paint of the toys.

Lead in children's products poses a serious hazard because exposure to lead can affect almost every organ and system in the human body. Children exposed to h igh levels of lead can suffer from damage such as IQ deficits, attention deficit hyperactivity disorder, motor skills, and reaction time. Considering the damages that lead can cause to humans, particularly child ren, the U.S. government Limited the permissible amount of lead in products. Under the Consumer Safety Product Act 1972, lead in products accessible to children should not be greater than 600 parts per million (ppm).The standards for permissible lead in other products va1y depending on the usage and amount of lead in the product that is accessible.

Although lead use is banned or restricted in many developed countries, the same is not true for developing countries. In developed countries, the only source of lead exposure to children is from paint. In contrast, lead exposure in developing countries occurs due to lead gasoline, ceramics, mining, batteries, and even medication and cosmetics. Manufacturers use paint with a high percentage of lead because it is highly resistant to corrosion, extremely malleable, and has poor electrical conductivity. In addition, paint with higher lead is heavy and bright, making products such asjewelry more appealing to consumers.

While excess lead in toys and other children's products is an issue of concern, CPSC has identified another major hazard associated with small magnets in toys. Due to the availability of powerful rare-earth magnets at cheap prices. the manufacturers began to use them in many toys, such as building blocks and jewelry. On some of these products, the magnets came loose. If a child swallowed more than one magnet, they could attach to each other and cause intestinal perforations and blockage, which can be fatal. In April 2006, CPSC and Rose Art Industries recalled 3.8 million Magnetix magnetic building sets following the death of a 20-month-old boy after he swallowed magnets that twisted his small intestine and created a blockage. In addition, several other children required surgery and intensive care to remove the magnets they swallowed .18

Following the recall of Magnetix building sets, Rose Art Industries redesigned its building sets to cover the magnets and reinforced these with resins so that the magnets could not be detached from the building set. Further, they changed the age suita bility of their product to six years or older and provided new warnings about the dangers associated with ingesting magnets .19 The recall of Magnetix was followed by another five recalls of toys that contained small magnets that detached . One of those recalls involved 2.4 million Polly Pocket play sets (an additional 2 million sets were sold worldwide), which was prompted by 170 reports of magnets coming loose and three children who swallowed the magnets requiring surgical care.20 The Polly Pocket play sets, recalled on November 21, 2006, were made by Mattel and sold between May 2003 and September 2006.

MATTEL - THE N0.1 TOY MAKER IN THE WORLD

With a vision to provide "the world 's premier toy brands -today and tomorrow," Mattel "designs, manufactures, and markets a broad variety of toy products worldwide through sales to its customers and directly to consumers."2 1 Mattel's position as a leader in the global toy industry was so formidable that Mattel 's international business division, with gross sales of $ 2.7 billion in 2006, would be the industry 's third largest company, if it was a separate company, and Mattel 's U.S. business with $3.4 billion would still be No.1.22

Mattel was an industry leader not only by its sales, but also through its pioneering efforts to be a good corporate citizen . In 1996, Mattel initiated its Global Manufacturi ng Principles, which aimed to ensure responsible management practices used in Mattel's fuctories as well as by its vendors. Mattel's factories were audited by the lntemational Center for Corporate Accountability , an independent body, and its results made publicly available by Mattel. Mattel engaged in philanthropic activities through Mattel Children's Foundation in 37 countries. It was named one of the top J OO Best Corporate Citizens by CRO Magazine i n 2006. More saliently, Mattel's corporate governance received the highest global rating of I 0 by Governance Metrics International (GMJ), which placed the company among the top one per cent of more than 3,400 global companies.

The journey of Mattel, however, began modestly in 1944, when Harold Matson and Elliot Handler began to make toys out of a converted garage in California. They named the company Mattel, using letters from their last and first names. Matson sold his share to Elliot Handler and his wife, Ruth Handler, who incorporated the company in 1948. Mattel's first products were picture frames and doll house fumiture.23 Jts first big product was a mass-produced, and thus, inexpensive music box, which established Mattel firmly in the toy business . The introduction of Barbie in 1959,and Ken two years later, propelled company growth . The products introduced later, such as Hot Wheels, went further to establish Mattel's position as an industry leader. Mattel went pu blic in 1960.

Mattel 's products were organized in three different business groups:(i) Mattel Girls & Boys Brands, which includes brands like Barnie dolls and ac.cessories, Polly Pocket, Hot Wheels, Matchbox, Batman, CARS, and Superman. (ii) Fisher-Price Brands, consisting of brands such as Fisher-Price, Little People, Sesame Street, Dora the Explorer, Go-Diego-Go!, Winnie the Pooh, and Power Wheels. (iii) American Girl Brands , with brands such as Just Like You and Bitty Baby. In the United States alone, the sales of these three groups in 2006 were: Mattel Girls & Boys Brands -$1.57 billion, Fisher-Price Brands -$1.47 billion, and American Girl Brands -$0.44 billion. About 45 per cent of Mattel 's sales were accounted for by three major buyers: Wal-Mart, Toys'R'Us, and Target. In addition to its principal competitors, such as Hasbro and RC2, Mattel also competed with a large num ber of smaller companies that made toys, v ideo games, and consumer electronics, and pu blished children's books.

Jn the 1990s, Mattel made a num ber of significant acquisitions, including Fisher -Price (1993, leader in pre­ school segment), Kransco (1994, made battery-powered ride-on vehicles), Tyco (1997, made Tickle Me Elmo and Matchbox cars), Pleasant Company (1998, mail-order firm that made American Girl-brand books, dolls,and clothing), and Bluebird Toys (1998, made toys such as Polly Pocket and The Tiny Disney Collection). Mattel 's acquisition of The Learning Company, a leading educational software maker, in 1999 at a cost of $3.6 billion proved to be troublesome. The company lost money and was later sold. Mattel also made a hostile bid to acquire Hasbro, the second-largest toy company. This bid, made in 1996, failed to materialize .

The toy industry is different from other industries on two major counts. First, toy sales are seasonal. Most sales occurred during the third and last qua11er of the year, which coincide with the traditional holiday period. Second, there is a lot of uncertainty around new product success. It was difficult, almost impossible, to predict whether a particular toy would be liked by children . Not surprisingly, many companies in the toy industry made millions with one succ.essful toy and also went bankrupt with one big failure.

Over a long period, Mattel had managed the pecul iarities of the toy industries well with a num ber of innovative and often revolutionary ideas. Traditionally, the retailers promoted toys during the holiday season and toy manufacturers had little, if any, role to play. In 1955, Mattel tied up with ABC Television and sponsored a 15-minute segment of Walt Disney 's Mickey Mouse Club for one full year. At that time, Mattel 's revenues were only $5 million, but it paid $500,000 for the sponsorship. The sponsorship quickly established a continuous connection for Mattel with the kids and gave it an opportunity to influence the buying habits of its consumers. Not surprisingly, this move changed the nature of marketing in the toy industry. Also, for Mattel, it paved the way for further partnerships with entertainment companies to produce character toys.

Mattel entered into licensing agreements to make toys based on the characters owned by companies such as Disney, Warner Brothers, Viacom (Nickelodeon), Origin Products, and Sesame Workshop. These agreements gave the company access to characters such as Winnie the Pooh, Disney Princesses, CARS, Dora the Explorer, Go-Diego-Go!, Sponge Bob SquarePants, Polly Pocket, Batman, Superman, and Elmo. Jn 2005, Mattel partnered with Scholastic Entenainment to produce educational learning systems. Not only did l\llattel license characters, but also Iicensed some of its core brands to other non-toy companies to design and develop an array of products sporting the core brand names . These deals included Barbie eyewear for little girls (with REM Eyewear), Hot Wheels apparel and accessories (with lnnovo Group), Barbie video games (with Activision), and CD Players, teaming laptops, and MP3 players .

Recently , Mattel was trying to reduce its reliance o.n its big customers, such as Wal-Mart, Target, and Toys'R'Us, through internet and catalogue sales.24 Traditionally, toy companies relied on point-of-sale (POS) data to forecast demand for toys. With its Hot Wheels brand, Mattel realized that variety was the key driver of the sales and introduced a rolli ng mix strategy. This strategy involved changing the physical 72-car assortment mix by seven to eight per cent every two weeks. This changed the nature of its practices and instead of relying on POS data, Mattel only needed to design the varieties and supply an assortment pack to the retailer .25

Mattel designed and developed toys in its corporate headquarters . ln 2006, Mattel spent US$174 million on in-house product design and development. 111 contrast, the company spent US$261 million on royalties and US$65 J million on advertising. Mattel manufactured products in its own factories as well as through third­ party manufacturers. Also, it marketed the products purchased from unrelated companies that designed, developed, and manufactured those products .

Offshoring the Toy Production

Mattel 's principal manufacturing facitities were located in China, Indonesia, Thailand, Malaysia , and Mexico. It closed its last toy factory in the U.S., originally part of its fisher-Price divisions, in 2002 .26 Mattel produced its core brands, such as Barbie and Hot Wheels, in company-owned facilities , but used third-party manufacturers to produce its non-core brands. It used third-party manufacturers in a number of countries, including the United States, Mexico, Brazil, India, New Zealand, and Australia. This manufacturing mix minimized Mattel's risk and gave it focus and flexibility. The core brands were a staple business, while the non-core brands tended to be those products that were expected to have a short market life. The non-core brands were typically associated with popular movie characters and had a life of one year.21 The development of new toys was done at Mattel 's corporate headquarters. Outsourcing for the manufacturing of non-core brand toys followed a strict multi-step process . The design teams created a bid package containing the new product's blueprint and engineering specifications. It often contained a physical model. After the selection of a vendor, the company established the vendor's production infrastructure. At this point, Mattel assumed responsibility for the cost of tooling. The vendor then produced 50 units as "First Shots"to verify if any tool modifications were required.This was followed by one or more "Engineering Pilot," depending on the toy's complexity, and the "Final Engineering Pilot." After this, a "Production Pilot'' of 1,000 units was run using the entire assembly line to run the product. Finally, the"Production Start''phase began only when the new toy met design compliance .28

Mattel and its vendors manufactured about 800 million products each year. Approximately half of the toys Mattel sold were made in its own plants, a higher proportion than other large toy makers . Also, Mattel made a larger percentage of its toys outside China than other large toy companies. Mattel 's manufacturing and offshoring strategy was developed over a period of five decades. The company made its first Barbie doll in Asia in 1959. Since then , Mattel managed the risks of offshored operations by employing a mix of company-owned and vendor-owned manufacturing facilities all over Asia .

In China alone, Mattel had contracts with approximately 37 principal vendors who made toys for the company.29 The principal vendors further used smaller companies for the full or pa11ial production of toys. As a result, the supply chains in China were long and complex. According to some estimates , about 3,000 Chinese companies made Mattel products .30 However, Mattel had direct contact only with the principal vendors.

A RECALL UNDERWAY

In June 2007, a French direct importer of Mattel 's products , Auchan, performed pre-shipment tests with the help of Intertek, an independent laboratory. These tests revealed that Mattel's toys, made by vendor Lee Der Industrial Company, contained lead above permissible limits. lntertek sent the test results, on June 8, 2007, to Mattel employees in China. Consequently, Mattel employees contacted Lee Der instructing it to correct the problem and provide another sample for testing. Another test by Intertek on June 29, for Auchan, on the same toy produced by Lee Der had passed the test.

On June 27, 2007, Mattel 's call center in the United States received a report from a consumer, who informed them that a home test kit found excessive lead in Mattel 's toys. These were also manufactured by Lee Der. Following this, Mattel tested five samples of Lee Der toys and found on July 6 that three of them contained excess lead. As the testing was underway, Auchan informed Mattel on July 3 about lead violations in another toy made by Lee Der. As soon as the test results were out, Mattel employees in China notified Lee Der and stopped accepting products made by Lee Der. Further tests on the toy samples collected from Lee Der were conducted on July 9 in Mattel's own laboratories, which revealed that nine of the 23 samples of Lee Der toys contained excess lead :in surface paint.

Mattel 's employees in China notified the senior management team at corporate headquarters on July 12 about the issues with Lee Der products . Following this, Mattel management ordered an immediate suspension of all shipments of products made by Lee Der. Further investigatio11s by Mattel revealed that the nonconformi ng lead levels were because of a yellow pigment in paint used on portions of toys manufactured by Lee Der.31

Lee Der Industrial Company was located in Foshan City of Guangdong Province, where thousands of small toy factories existed. The company was founded by two Chinese entrepreneurs, Cheng Shu-hung and Xie Yuguang. Mattel first used Lee Der for making a small batch of educational toys in 1993. By July 2007, Lee Der employed approximately 2,500 people and made toys almost exclusively for Mattel. With annual sales of about $25 million, Lee Der was about to open a new $5 million plant.32

Lee Der had purchased its paint from Dongxing New Energy Co.since 2003. The owner of Dongxing was a good friend of Cheng Shu-bung. In April 2007, D011gxing ran out of yellow pigment and sourced about 330 pounds of it for $1,250 from Dongguan Zhongxin Toner Powder Factory . Then, Dongxing supplied the paint to Lee Der, which used it in Mattel 's toys. Initial reports suggested that Dongguan Zhongxin Toner Powder Factory was fake and that its owners were not traceable.33

An essential component of Mattel 's contracts with its vendors is that the products made by vendors comply with applicable safety standards . Mattel had systems that required the vendors to either purchase paint from a list of eight certified vendors in China or test for compliance each batch of the pai nt purchased from a non-certified vendor . Mattel also conducted audits of certified paint suppliers and vendors to ensure that Mattel 's requirements were being followed.The frequency of audits depended on Mattel 's prior experience with the suppliers and vendors.

Following its investigations, Mattel filed an initial report with the CPSC on July 20 and followed it up with another on July 26, indicating that it would like to is·sue a recall of all the products manufacnired by Lee Der between April 19, 2007 (the date when Lee Der took delivery of the lead-tainted paint from its supplier), and July 6, 2007, the date when Mattel stopped accepting products from Lee Der.34 Work on this recall was underway and Mattel and the CPSC were scheduled to announce the recall on August 2, 2007. See Exhibit 6 for the press release announcing the recall expected to be issued by the CPSC. Mattel had already informed big retailers such as Wal-Mart and Toys 'R'Us of the impending recall. The retailers pulled the toys off their shelves and flagged the cash registers so that customers could not buy the toys from the stores.35

ANOTHER INSTANCE OF LEAD AND FURTHER REPORTS OF LOOSE MAGNETS

While Mattel was prepari ng to announce its recall, on July 30, 2007, it found that paint on Sarge cars contained excess lead. The Sarge cars were made for Mattel by Early Light Industrial Company, Ltd. of Hong Kong, which made them in its manufacturing facility located in Pinghu, China.36 Early Light had supplied toys to Mattel for 20 years.37 Only further investigation would be able to clarify where exactly in the supply chain the problem originated, and why . Initial reports indicated that approximately 250,000 Sarge cars made between May 2007 and August 2007 may have been affected with lead paint.

After the November 2006 recall of eight different Polly Pocket play sets made in China for the problem of magnets coming loose, Mattel reinforced the magnets. by locking them in the toys rather than gluing them. Nonetheless, in recent months, Mattel had received a few hundred reports of magnets coming loose from a number of play sets sold before Novem ber 2006. The play sets affected with magnet problems were: (i) fifty additional models of Polly Pocket play sets (about five million of these play sets were sold between March 2003 and November 2006), (ii) Batman and One Piece action figures (about 350,000 toys sold between June 2006 and June 2007), (iii) Barbie and Tamier play sets (about 683,000 toys sold between May 2006 - July, 2007), and (iv) Doggie Day Care play sets (about one million sold between July 2004 and July 2007).

Recalls are a nightmare to companies for several reasons. First, the recalls pose major logistics challenges as the company needs to establish a set-up to handle the recalls . Second, the company has to deal with regulators who tend to push the company to ensure that not only a recall is issued, but the products in consumers' hands are actually returned to the company. Third, recalls are often viewed as an admission of guilt and open the company to consumer litigations. Finally, recalls damage the reputation of the company and result in increased costs, lost sales, and stock price erosion.

Mattel and Fisher Price were not new to recalls. In their long history, they had recalled products in the past (see Exhibit 7). Nevertheless, the current situation seemed entirely new, complex, and challenging. It was not clear if and which products needed to be recalled . As importantly, how could the company minimize the negative consequences that were germane to any product recall? Finally, how could the company ensure such recalls did not recur?

Write a Python 3 program called “parse.py” using the template for a Python program that we covered in this module. Note: Use this mod7.txt input file.

Name your output file “output.txt”.

Build your program using a main function and at least one other function.

Give your input and output file names as command line arguments.

Your program will read the input file, and will output the following information to the output file as well as printing it to the screen:

1. Output the full text of the file
2. Output the number of words in the file
3. Output the number of sentences in the file
4. Output the first sentence in the file
5. Output the last sentence in the file
6. Output the length of the first sentence
7. Output the length of the last sentence

This is mod7.txt

I do not come here as an advocate, because whatever position the suffrage movement may occupy in the United States of America, in England it has passed beyond the realm of advocacy and it has entered into the sphere of practical politics. It has become the subject of revolution and civil war, and so tonight I am not here to advocate woman suffrage. American suffragists can do that very well for themselves. I am here as a soldier who has temporarily left the field of battle in order to explain - it seems strange it should have to be explained, what civil war is like when civil war is waged by women. I am not only here as a soldier temporarily absent from the field at battle; I am here, and that, I think, is the strangest part of my coming, I am here as a person who, according to the law courts of my country, it has been decided, is of no value to the community at all; and I am adjudged because of my life to be a dangerous person, under sentence of penal servitude in a convict prison. It is not at all difficult if revolutionaries come to you from Russia, if they come to you from China, or from any other part of the world, if they are men. But since I am a woman it is necessary to explain why women have adopted revolutionary methods in order to win the rights of citizenship. We women, in trying to make our case clear, always have to make as part of our argument, and urge upon men in our audience the fact, a very simple fact, that women are human beings. Suppose the men of Hartford had a grievance, and they laid that grievance before their legislature, and the legislature obstinately refused to listen to them, or to remove their grievance, what would be the proper and the constitutional and the practical way of getting their grievance removed? Well, it is perfectly obvious at the next general election the men of Hartford would turn out that legislature and elect a new one. But let the men of Hartford imagine that they were not in the position of being voters at all, that they were governed without their consent being obtained, that the legislature turned an absolutely deaf ear to their demands, what would the men of Hartford do then? They couldn't vote the legislature out. They would have to choose; they would have to make a choice of two evils: they would either have to submit indefinitely to an unjust state of affairs, or they would have to rise up and adopt some of the antiquated means by which men in the past got their grievances remedied. Your forefathers decided that they must have representation for taxation, many, many years ago. When they felt they couldn't wait any longer, when they laid all the arguments before an obstinate British government that they could think of, and when their arguments were absolutely disregarded, when every other means had failed, they began by the tea party at Boston, and they went on until they had won the independence of the United States of America. It is about eight years since the word militant was first used to describe what we were doing. It was not militant at all, except that it provoked militancy on the part of those who were opposed to it. When women asked questions in political meetings and failed to get answers, they were not doing anything militant. In Great Britain it is a custom, a time-honoured one, to ask questions of candidates for parliament and ask questions of members of the government. No man was ever put out of a public meeting for asking a question. The first people who were put out of a political meeting for asking questions, were women; they were brutally ill-used; they found themselves in jail before 24 hours had expired. We were called militant, and we were quite willing to accept the name. We were determined to press this question of the enfranchisement of women to the point where we were no longer to be ignored by the politicians. You have two babies very hungry and wanting to be fed. One baby is a patient baby, and waits indefinitely until its mother is ready to feed it. The other baby is an impatient baby and cries lustily, screams and kicks and makes everybody unpleasant until it is fed. Well, we know perfectly well which baby is attended to first. That is the whole history of politics. You have to make more noise than anybody else, you have to make yourself more obtrusive than anybody else, you have to fill all the papers more than anybody else, in fact you have to be there all the time and see that they do not snow you under. When you have warfare things happen; people suffer; the noncombatants suffer as well as the combatants. And so it happens in civil war. When your forefathers threw the tea into Boston Harbour, a good many women had to go without their tea. It has always seemed to me an extraordinary thing that you did not follow it up by throwing the whiskey overboard; you sacrificed the women; and there is a good deal of warfare for which men take a great deal of glorification which has involved more practical sacrifice on women than it has on any man. It always has been so. The grievances of those who have got power, the influence of those who have got power commands a great deal of attention; but the wrongs and the grievances of those people who have no power at all are apt to be absolutely ignored. That is the history of humanity right from the beginning. Well, in our civil war people have suffered, but you cannot make omelettes without breaking eggs; you cannot have civil war without damage to something. The great thing is to see that no more damage is done than is absolutely necessary, that you do just as much as will arouse enough feeling to bring about peace, to bring about an honourable peace for the combatants; and that is what we have been doing. We entirely prevented stockbrokers in London from telegraphing to stockbrokers in Glasgow and vice versa: for one whole day telegraphic communication was entirely stopped. I am not going to tell you how it was done. I am not going to tell you how the women got to the mains and cut the wires; but it was done. It was done, and it was proved to the authorities that weak women, suffrage women, as we are supposed to be, had enough ingenuity to create a situation of that kind. Now, I ask you, if women can do that, is there any limit to what we can do except the limit we put upon ourselves? If you are dealing with an industrial revolution, if you get the men and women of one class rising up against the men and women of another class, you can locate the difficulty; if there is a great industrial strike, you know exactly where the violence is and how the warfare is going to be waged; but in our war against the government you can't locate it. We wear no mark; we belong to every class; we permeate every class of the community from the highest to the lowest; and so you see in the woman's civil war the dear men of my country are discovering it is absolutely impossible to deal with it: you cannot locate it, and you cannot stop it. "Put them in prison," they said, "that will stop it." But it didn't stop it at all: instead of the women giving it up, more women did it, and more and more and more women did it until there were 300 women at a time, who had not broken a single law, only "made a nuisance of themselves" as the politicians say. Then they began to legislate. The British government has passed more stringent laws to deal with this agitation than it ever found necessary during all the history of political agitation in my country. They were able to deal with the revolutionaries of the Chartists' time; they were able to deal with the trades union agitation; they were able to deal with the revolutionaries later on when the Reform Acts were passed: but the ordinary law has not sufficed to curb insurgent women. They had to dip back into the middle ages to find a means of repressing the women in revolt. They have said to us, government rests upon force, the women haven't force, so they must submit. Well, we are showing them that government does not rest upon force at all: it rests upon consent. As long as women consent to be unjustly governed, they can be, but directly women say: "We withhold our consent, we will not be governed any longer so long as that government is unjust." Not by the forces of civil war can you govern the very weakest woman. You can kill that woman, but she escapes you then; you cannot govern her. No power on earth can govern a human being, however feeble, who withholds his or her consent. When they put us in prison at first, simply for taking petitions, we submitted; we allowed them to dress us in prison clothes; we allowed them to put us in solitary confinement; we allowed them to put us amongst the most degraded of criminals; we learned of some of the appalling evils of our so-called civilisation that we could not have learned in any other way. It was valuable experience, and we were glad to get it. I have seen men smile when they heard the words "hunger strike", and yet I think there are very few men today who would be prepared to adopt a "hunger strike" for any cause. It is only people who feel an intolerable sense of oppression who would adopt a means of that kind. It means you refuse food until you are at death's door, and then the authorities have to choose between letting you die, and letting you go; and then they let the women go. Now, that went on so long that the government felt that they were unable to cope. It was [then] that, to the shame of the British government, they set the example to authorities all over the world of feeding sane, resisting human beings by force. There may be doctors in this meeting: if so, they know it is one thing to feed by force an insane person; but it is quite another thing to feed a sane, resisting human being who resists with every nerve and with every fibre of her body the indignity and the outrage of forcible feeding. Now, that was done in England, and the government thought they had crushed us. But they found that it did not quell the agitation, that more and more women came in and even passed that terrible ordeal, and they were obliged to let them go. Then came the legislation - the "Cat and Mouse Act". The home secretary said: "Give me the power to let these women go when they are at death's door, and leave them at liberty under license until they have recovered their health again and then bring them back." It was passed to repress the agitation, to make the women yield - because that is what it has really come to, ladies and gentlemen. It has come to a battle between the women and the government as to who shall yield first, whether they will yield and give us the vote, or whether we will give up our agitation. Well, they little know what women are. Women are very slow to rouse, but once they are aroused, once they are determined, nothing on earth and nothing in heaven will make women give way; it is impossible. And so this "Cat and Mouse Act" which is being used against women today has failed. There are women lying at death's door, recovering enough strength to undergo operations who have not given in and won't give in, and who will be prepared, as soon as they get up from their sick beds, to go on as before. There are women who are being carried from their sick beds on stretchers into meetings. They are too weak to speak, but they go amongst their fellow workers just to show that their spirits are unquenched, and that their spirit is alive, and they mean to go on as long as life lasts. Now, I want to say to you who think women cannot succeed, we have brought the government of England to this position, that it has to face this alternative: either women are to be killed or women are to have the vote. I ask American men in this meeting, what would you say if in your state you were faced with that alternative, that you must either kill them or give them their citizenship? Well, there is only one answer to that alternative, there is only one way out - you must give those women the vote. You won your freedom in America when you had the revolution, by bloodshed, by sacrificing human life. You won the civil war by the sacrifice of human life when you decided to emancipate the negro. You have left it to women in your land, the men of all civilised countries have left it to women, to work out their own salvation. That is the way in which we women of England are doing. Human life for us is sacred, but we say if any life is to be sacrificed it shall be ours; we won't do it ourselves, but we will put the enemy in the position where they will have to choose between giving us freedom or giving us death. So here am I. I come in the intervals of prison appearance. I come after having been four times imprisoned under the "Cat and Mouse Act", probably going back to be rearrested as soon as I set my foot on British soil. I come to ask you to help to win this fight. If we win it, this hardest of all fights, then, to be sure, in the future it is going to be made easier for women all over the world to win their fight when their time comes.

1. What does Puma need to do to maintain the leadership position in the Indian sportswear market?

2. How should Puma prepare to ‘fight’ the response from foreign brands in the Indian market?

3. What concepts and theories of international business are found in the Puma case? Briefly discuss each one and relate them to the case.

In September 2014, Puma retained star athlete Usain Bolt, the world’s fastest man, as brand ambassador and launched a new campaign — Forever Faster — to send the message that Puma was and would continue to be “the fastest sports brand in the world.”2 In August 2015, Puma launched its second round of Forever Faster campaigns with a new marketing line: “What are you training for?” The campaign promoted the idea of driving athletes to train harder in order to perform better. The multi-million euro campaign promoted the brand’s latest shoe with ads showing Bolt and the Arsenal football club undergoing limit-pushing training schedules over a course of four weeks to extract more from their performance.3 Puma wanted to make it clear to the world “that it needed to be seen as a major player — that life isn’t all about Adidas and Nike,” suggested Nigel Currie, managing director of the British company brand Rapport, a sports sponsorship agency.4 Puma’s global aspirations also extended to advancing its market position in India. Despite Puma’s presence in the Indian market since 2006, the sportswear brand had not realized its goal of capturing the lead position. Puma’s marketing push finally paid dividends when in June 2015, the brand recorded, for the first time, sportswear sales in India ahead of Adidas, Reebok, and Nike (see Exhibit 1).5 Puma’s success in India could be primarily attributed to the company’s marketing techniques, judicious expansion, and customer-acquisition strategy.6 Indian consumers were already changing their lifestyle in response to increased health concerns, and fitness programs were growing in popularity. The retail sportswear segment experienced unprecedented growth as a result, and companies rode the fitness wave to maximize returns on their investments. Puma had moved ahead of Adidas and Nike to become the leading brand in India, but how long would Puma be able to hold its position in the face of sustained expansion by domestic footwear brands such as Liberty Shoes Ltd (Liberty), Relaxo Footwear Ltd (Relaxo), and Paragon Footwear (Paragon)? These local brands had increased their retail footprint and were expanding their distribution networks beyond their regional presence in order to gain a substantial market share.7 Puma needed a plan to strengthen its branding and pricing strategies to stave off competition from these domestic companies. Could Puma sustain its leadership position in the years to come? PUMA WORLDWIDE Puma SE (Puma), headquartered in Germany, was considered one of the world’s leading sportswear brands. It had been designing, developing, marketing, and selling footwear, accessories, and apparels since 1948. The company categorized its product portfolio by sport (such as football, fitness and training, running, motorsports, and golf) and owned other popular brands, such as Puma, Dobotex, Cobra Golf, and Brandon (see Exhibit 2). Puma employed approximately 10,000 people and distributed its products in more than 120 countries worldwide.8 To capture a leadership position globally, Puma revised its mission statement in 2013 to “be the fastest sports brand in the world,” meaning fast reaction to new trends, reduced time to market with innovations, and speed in problem solving. The company’s repositioning initiative, such as its Forever Faster campaign, was a reflection of its new revised mission statement.9 PUMA INDIA Puma first entered the Indian market in the early 1990s with a licensing agreement with Carona. The agreement was revoked in 1998, and in 2002, Puma re-entered the Indian market by sharing its license and distribution partnership with Planet Sports. Under this model, Puma was responsible for quality and brand consistency while Planet Sports was in charge of sourcing, distribution, and retail of Puma products in India.10 India’s monthly per capita income was expected to grow by over 10 per cent in FY2015/16 in comparison to FY2014/15.11 The Indian consumer lifestyle had undergone a massive shift: disposable income levels had increased and people were adopting international brands.12 By 2006, there had been a fourfold increase in the availability of international accessories and shoe brands in India.13 To leverage this growing trend and strengthen its brand position in India, Puma established its first executive outlet in the country in 2006, manufacturing and distributing apparel, footwear, and accessories across multiple cities in the country.14 After three and a half years of operations, Puma reported a profit in 2009.15 Despite entering the Indian market after its peers (Nike, Reebok, and Adidas), Puma had consistently maintained its growth above the industry average rate and, ultimately, in 2015, surpassed its competition to gain a leading position.16 In 2015, Puma recorded its highest number of sales in India, for the first time ahead of its competitors Adidas, Nike, and Reebok.17 SUCCESS MANTRA Puma’s marketing strategy, judicious expansion plans, and resistance to using discount campaigns led to Puma’s lead in India.18 Retail Strategy Puma’s position as leading sportswear brand in India was primarily due to Puma’s prudent expansion strategy and clever vendor engagement. Puma focused on long-term sustainability, never opening multiple stores in the same location. This safeguarded the brand from over-distribution and helped Puma maintain the quality of distribution across its stores.19 With this strategy, Puma steadily built its network of 340 stores across 115 cities in India. Of the 340 stores, 320 stores were operated under the franchise model.20 Puma reported 13 per cent same-store sale growth in 2014 as compared to 2013. In addition to maintaining tight control over its distribution network, Puma adopted a clever vendor engagement. When Reebok closed 300 of its 900 stores, retailers were handicapped. Puma leveraged this opportunity to gradually grow its partnership with Rishabh Sports Station — Reebok’s biggest vendor — and with other vendors in order to fill the market gap left by Reebok’s absence.21 Product Portfolio With the rise in disposable incomes, change in consumer preferences, and escalating health awareness, sports apparel and equipment companies were launching new products and models to satisfy growing Indian consumer demand. To take advantage of this opportunity, Puma introduced two of its leading shoe brands — Mobium and Faas — to Indian consumers in fiscal year FY2014/15. Mobium Ride, the average price for a traditional, men’s athletic jogging shoe, was priced at US$138.04; the model Faas 600S was priced at US$122.7022 — comparable to pricing by Nike and Adidas. Puma also launched the Nightcat Powered edition under its Mobium brand, and introduced its Ignite brand of running shoes and Alexander McQueen’s stylish global collection to Indian consumers.23 Puma planned to add other brands from its global portfolio to India’s product portfolio in the coming years.24 To build strong brand loyalty, Puma focused on developing products that fit well, were light, and moved with the person wearing the product. The style quotient was always a crucial parameter in Puma’s product mix. Consumers were central to Puma’s strategy; hence, after assessing a demand for flip-flops and sandals, Puma introduced a collection of stylish wear exclusively for the Indian market. Puma sold over 5 million pairs of flip-flops and sandals in FY2014/15.25 Promotional Strategy Puma built its brand on the pillars of a desirable product mix and engaging marketing.26 In addition to being known for sports apparel, Puma gradually built its image as a fashion inspirational brand with dynamic designs and stylish products. Consumers associated the fashion items with unchallenged passion, determination, and sentiment for sport.27 As part of its initiative to increase brand awareness, the company launched a Forever Faster campaign in partnership with the Indian Super League football franchise.28 This tie-up fit well with Puma’s plan to focus on a football wear collection and concentrate its marketing efforts around football.29Puma had Usain Bolt, a world-record holding sprinter and Puma’s brand ambassador, launch the Forever Faster campaign in India in September 201430 to signal the brand’s seriousness about making Puma the fastest sports brand in India. To raise the consumer engagement level, Puma invested in a food, drinks, and entertainment venue — the Puma Social Club. The club was located in the poshest area of Bengaluru and was a hit among the local millennials.31 In addition, Puma put together a compilation of music and a concert series under Puma Loves Vinyl — a campaign to connect with consumers at a personal level.32 Price With growing competition, Puma had two options to push its sales further: the company could use a discounting model, like its competition, or continue on the path of sustained and slow growth.33 The company decided to persist with the gradual growth strategy, which brought Puma the success it sought. To make the brand accessible to more customers, Puma lowered the entry barrier with low-priced entry products. Puma’s products ranged from an affordable $25 to $230.34 Customer Focus Puma focused on continuous monitoring and improvement of the customers’ store experience. The brand had a huge fan following, particularly among the youth. Being consumer-centric, Puma developed its products after identifying these consumers’ needs. The consequent launch and success of flip-flops and sandals exclusively for the Indian market validated Puma’s effort and commitment.35 In line with its focus on India, Puma launched an exclusive fitness shoe for women, Pulse XT, in the summer of 2015. Abhishek Ganguly, managing director of Puma India, declared, “We have planned a very aggressive autumn and winter and will continue to launch global innovative technology-oriented products suitable for India. You will see a lot more of us.”36 E-Commerce Model Worldwide use of smartphones and tablets to access the Internet drove the e-commerce model on an unprecedented growth trajectory. With all companies trying to gain a share of the online market, Puma, too, built its presence through popular marketplaces such as Amazon, Jabong, Snapdeal, and Flipkart. In late 2013, former managing director of Puma India, Rajiv Mehta, indicated that selling Puma’s products online was a marketing advantage the company wanted to exploit: Between 16 [and] 25 years of age, a lot of people are shopping online. Because we are a lifestyle brand, consumers end up shopping multiple times for a lifestyle product than a performance product which lasts for some time. . . . 37 Online is a lot more dynamic. If I want to launch a new shoe, all I have to do is make sure it’s in my warehouse and take the graphic, which can happen in two hours. Our online business is as good as a Brigade Road store in Bangalore and is one of the largest store equivalents in terms of sales. Also, it's a marketing advantage, if not anything else.38 To curb heavy online discounts, Puma excluded online franchise operations.39 Puma earned a 15 per cent revenue share from its online segment in 2014. To extend its online reach, Puma planned to boost its online presence and strengthen the content and offerings of its online portal, Puma.com.40 INDIAN SPORTSWEAR MARKET The sportswear industry was defined as an aggregation of performance, outdoor, and sports-inspired clothing and footwear.41 All kinds of dresses, shorts, trousers, tops, coats, jackets, track suits, athletic sets, swimwear, underwear, hosiery, clothing, and accessories (including gloves, headwear, and scarves) were included under the clothing segment. Children’s, men’s, and women’s footwear — sports shoes, sandals, pumps, and more — were included under the footwear category.42 The sportswear industry in India was valued at $3 billion in 2013 and was predicted to reach $4.9 billion by 2018.43 The industry grew 25 per cent in 2013 and was expected to increase at a compounded annual rate of 10 per cent from 2013 to 2018. Within the sports apparel segment, current sales value of performance apparel grew by 20 per cent; outdoor apparel, by 28 per cent; and sports-inspired apparel, by 18 per cent, in 2013 (see Exhibits 2 and 3).44 MAJOR COMPETITORS Adidas Adidas had ruled the Indian sportswear industry for more than a decade. The increasing presence of the brand across major Indian cities and its tie-up with the Indian cricketer icon, Sachin Tendulkar, for advertisements helped the firm become a sportswear leader.45 To further increase its market presence across the world, Adidas acquired Reebok in 2005 for $3.8 billion.46 However, since 2012, Reebok’s Indian arm was tangled in various commercial irregularities.47 Owing to the irregularities in the Indian unit, Adidas reported a loss of €125 million (roughly equivalent to ?8.7 billion or US$135 million in 2005) from its global profits. Further losses of €70 million (?4.88 billion or US$76 million in 2005) were estimated if the case was not handled soon.48 The failure to leverage the Reebok brand added to Adidas’ financial losses; in 2015, Adidas lost its position as market leader. Adidas indicated it might sell Rockport, Reebok’s shoe brand, to regain its position in India.49 To start a fresh chapter, in September 2015, Adidas identified Ranveer Singh as brand ambassador for its streetwear label Adidas Originals,50 leveraging the actor’s stardom and his connection with youth. Reebok Although a relatively small player, Reebok had an established market in key regions such as North America and India. In order to grow its market presence, Reebok was purchased by Adidas in 2005 for US$3.8 billion. In India, Reebok targeted the 15 to 50 age group and promoted its brand with advertisements targeted at cricket.51 However, in 2012, Adidas announced that it had uncovered several incidents of commercial irregularities at Reebok’s India unit. As a consequence, Adidas closed a substantial number of Reebok outlets.52 Reebok’s struggles resulted in poor financials in 2013.53 In a bid to regain its leadership position in sportswear in India, Reebok planned to launch more than 100 of its FitHub54 stores, targeted towards urban consumers.55 Nike Nike had an established base in India. The company had a strong year in 2013 with respect to returns and investments. The company increased its investment in brand promotions with targeted advertisements and official sponsorship of the Indian cricket team. In addition to brand promotions, Nike strengthened its distribution network across smaller cities with a larger presence in multi-brand outlets.56 To drive its sales further, Nike offered various seasonal discounts and offers to lure customers. Instead of investing in an online retailing site of its own, Nike established an online presence through tie-ups with several marketplaces, such as Snapdeal, Flipkart, Jabong, and Myntra.57 Although Nike did not market its own products online, it did use its website to keep fans abreast of the latest product launches and store releases.58 Domestic Companies In addition to global sportswear brands, India had an established presence of popular regional brands such as Liberty, Lancer, and Relaxo. Affordable sportswear products from regional brands were gaining popularity among Indian consumers. These brands slowly bridged the gap between the domestic and international brand sales by introducing new designs and colors as part of their product portfolios. Leading footwear manufacturers, such as Relaxo and Liberty, launched women’s footwear designs to target a growing market need. Domestic companies invested in increasing their penetration across India and launching desired brand variants within different price platforms in order to tap into the burgeoning opportunity59. THE CHANGING INDIAN CONSUMER India's economic growth and rising household incomes were expected to take consumer spending to a level of $3.6 trillion by 2020. Food, housing, consumer durables, transport, and communication were expected to reap the most of consumer spending. The Indian consumer market was dominated by the younger generation and was becoming increasingly sophisticated and brand conscious. Young upper-middle-class consumers were looking beyond the utility aspect of a product to seek brand and lifestyle statements connected with the product.60 India’s consumer confidence continued to be the highest globally and had improved more in the second quarter of the 2015 calendar year due to a positive economic environment and low inflation.61 There was a visible change in consumer attitude towards sports and fitness as a result of an increase in health awareness.62 With the inclusion of physical exercise in an Indian’s daily regime, many state governments were building parks in urban locations to cater to the demand for morning and evening walks.63 Gyms and health clubs in India were taking advantage of the opportunity and offering a variety of fitness programs, such as yoga, dancing, spinning, aerobics, and more.64 With the growing presence of fitness and health clubs and gyms in metropolitan areas and top-tier cities in India,65 the sportswear industry was set for unprecedented growth.66 Additionally, an increasing number of sporting events, such as the Indian Premier League and marathon events, fostered sports growth in India.67 PUMA’S DILEMMA The evolving consumer landscape, rising e-commerce opportunities, and increasing health awareness had fueled massive growth in the sportswear industry. After continuous efforts over eight years, Puma was at last in the number one brand position in India, taking the lead from Adidas.68 However, although Puma led Adidas and Nike in total sale volumes, there was only a narrow differential margin among the three. This implied that the 1–2–3 positions could undergo reshuffling anytime in the future.69

U.S. Foodservice: A Case Study in Fraud and Forensic Accounting

Maria H. Sanchez

Christopher P. Agoglia^[1]

Ahold’s audit committee ordered investigations at the parent company and at 17 Ahold operating and real estate companies to look for accounting errors, irregularities, and other issues as well as assess internal controls and management integrity (Ahold, 2003a).   After a forensic audit, Ahold eventually reported that the overstatement of U.S. Foodservice’s earnings was more than $850 million (Ball, 2003). A large component of the overstatement resulted from improper recognition of promotional allowances. Several U.S. Foodservice employees and vendors either admitted to or were convicted of playing a role in the fraud. In this case, students will gain insights into the proper accounting for and disclosure of promotional allowances and also the risk of over-reliance on third party confirmation as an audit procedure. Students will also distinguish between a financial statement audit and a forensic audit.

Accounting for cash consideration from vendor rebates, also known as “promotional allowances,” was at the center of the U.S. Foodservice’s earnings restatement. Rebates of this type are common in the grocery and foodservice industries and are frequently material in amount, sometimes exceeding 5% of sales. Vendors can offer rebates to customers in exchange for favorable display space in stores, or they may give volume rebates to provide an incentive to a retailer to increase sales of the vendor’s products, with the rebate percentage increasing as the retailer’s sales volume increases. However, these rebates are problematic in several respects. At the time of U.S. Foodservice’s accounting irregularities, there was no standardized accounting treatment of these rebates. Companies have accounted for them differently, and there have been differing levels of disclosure regarding their amounts. The investigation at U.S. Foodservice revealed that determination of rebates receivable can be problematic.

WHAT HAPPENED AT U.S. FOODSERVICE

            U.S. Foodservice was acquired by Ahold in 2000. Prior to this, U.S. Foodservice used KPMG as their auditor. After the acquisition, U.S. Foodservice was audited by Deloitte &

Touche, Ahold’s auditor. During their 2002 audit of Ahold’s financial statements, as part of their confirmation process at U.S. Foodservice, Deloitte discovered that certain accrued vendor allowance receivable balances were overstated. Deloitte uncovered a series of accounting irregularities at U.S. Foodservice and other Ahold subsidiaries and also improper accounting for certain of Ahold’s joint ventures (Parker, 2003). Deloitte immediately withdrew their audit opinions for 2000 and 2001 and suspended work on the 2002 audit.  

            There appeared to be a confluence of economic conditions, managerial “inventiveness,” and failures of internal controls that led to the accounting irregularities at U.S. Foodservice.

Company sales for the year 2002 had been decreasing. In last quarter of 2002, upper management held a conference call with its divisional managers advising them that their annual bonuses were at risk if sales were not boosted. According to testimony provided by those inside the company, in that conference call, the company’s chief operating officer described an

“initiative” that would increase the likelihood of managers receiving their bonuses and help the company achieve its sales target for the year. Quite simply, the strategy was to order large amounts of inventory and immediately recognize the vendor rebates that accompanied them. The rebates were in many cases substantial and, according to some sources, ranged from 8.5% to 46% of the purchase price. Divisional managers stated that they were told by upper management that if they did not place orders for additional inventory, then it would be done for them. These managers reported that it was made clear that if they did not go along with the “initiative,” not only were their bonuses in jeopardy, but perhaps their jobs were as well (Stecklow, Raghavan, & Ball, 2003).

Soon the warehouses at U.S. Foodservice were overflowing with inventory of foodrelated items and paper products. The amount of inventory the company purchased was so large that it had to rent additional space and refrigerator trucks to store it. As purchases increased, the vendor rebates to which U.S. Foodservice were entitled also increased. Supplier rebates increased from approximately $125 million in 2000 to about $700 million in 2003 (Bray, 2006). These rebates were recognized immediately as products were purchased in an attempt to boost earnings. The excess inventory was so immense, however, that even after the announcement of the earnings restatement, it was questionable whether the company would be able to sell it. In an effort to unload the massive amount of product in its warehouses, the company had to reduce its selling price below its original cost in some cases (Stecklow, Raghavan, & Ball, 2003).

During the audit of U.S. Foodservice, third party confirmations of rebates receivable had been provided by the vendors’ salespeople, not their accounting departments. According to complaints filed by the SEC, employees at U.S. Foodservice urged their vendors to complete and return to the auditors false confirmation letters with dollar amounts intentionally overstated, sometimes by as much as millions of dollars. Some vendors were pressured, some were provided with secret “side letters” assuring the vendors that they did not owe the amounts listed on the confirmations (Securities and Exchange Commission, 2006b).

In a span of several months, the “initiative” proposed by the company’s COO unraveled. Rather than helping the company out of its economic doldrums, the scheme instead resulted in earnings restatements, plunging stock price, several high-level managers losing their jobs, regulatory investigation of the company’s accounting practices, and allegations that officials in both the U.S. and Dutch offices had criminal intent to deceive and defraud the investing public

(Stecklow, Raghavan, & Ball, 2003). In July 2003, Dutch officials raided Ahold’s headquarters and began a criminal probe (Sterling, 2003). One year later, in July 2004, U.S. officials announced that two former U.S. Foodservice executives were being formally charged with conspiracy, securities fraud, and making false filings. Prosecutors also announced at the same time that two other U.S. Foodservice managers had admitted to their roles in the same alleged scheme of overstating earnings (McClam, 2004).

THE FORENSIC AUDIT

After the irregularities were uncovered by the external auditors, a criminal investigation was launched by the U.S. Department of Justice. In addition, Ahold appointed a team of forensic accountants from PricewaterhouseCoopers to work alongside the SEC. The forensic accountants had to sort through tens of thousands of documents (Datson, 2003). A U.S. federal grand jury issued subpoenas for Ahold documents for as far back as January 1, 1999 (Buckley and Chaffin, 2003).  

The forensic audit revealed fraud at U.S. Foodservice totaling over $850 million, with over $100 relating to 2000, over $200 million relating to 2001 and the rest relating to 2002. The fraud related to fictitious and/or overstated vendor allowance receivables and improper or premature recognition of vendor allowances and an understatement of cost of goods sold (Ahold, 2003a). Numerous U.S. Foodservice employees were involved in the fraud, and it was discovered that the fraud went back as far as 2000. U.S. Foodservice employees were found to have been using inflated recognition rates for vendor allowances and intentionally misapplying both Dutch and U.S. GAAP. Deloitte’s audit testing using third party confirmations failed to detect management’s misrepresentation of the reduction in cost of sales resulting from these manufacturer rebates (Bryan-Low, 2003).

The probe of U.S. Foodservice expanded to investigate several of the company’s suppliers, including Sara Lee and ConAgra Foods, to determine if they might have been complicit in U.S. Foodservice’s intent to misrepresent certain financial statement assertions. The investigation revealed that U.S. Foodservice employees asked salespeople at their vendors to sign false documentation for Deloitte and that some vendors cooperated with this fraudulent scheme. Three salespeople at Sara Lee admitted that they had signed off on, and forwarded to

U.S. Foodservice’s external auditors, erroneous documents that reflected inflated amounts owed to the company by Sara Lee (Callahan, 2003b). Similarly, at ConAgra Foods two salespeople also admitted to signing off on inflated amounts for manufacturer rebates due to U.S. Foodservice. ConAgra Foods claimed, however, that the erroneous confirmation amounts were discovered and that U.S. Foodservice’s external auditor was notified before news of the accounting scandal broke (Callahan, 2003a). The forensic examination at U.S. Foodservice also revealed numerous weaknesses in internal controls, including failure to properly record and track vendor allowances, inadequate accounting and financial reporting systems for vendor allowances, and failure to follow GAAP (Ahold, 2003a).

The investigation revealed fraud at not only U.S. Foodservice, but also at several other Ahold subsidiaries and the parent company. It was discovered at one subsidiary that fictitious invoices were used to conceal payments, and in some cases, payments were improperly capitalized rather than expensed. It was also discovered that the consolidation of certain joint ventures into Ahold’s financial statements was in error and that secret side letters had been concealed from Ahold’s audit committee and external auditors. Further, accounting irregularities and earnings management were uncovered at other subsidiaries and at the parent company.

Overall, more than 750 separate items related to internal control weaknesses and accounting issues were identified at Ahold and its subsidiaries (Ahold, 2003a). This extensive forensic examination led to a lengthy delay in the announcement of 2002 audited earnings numbers. Ahold’s 2002 annual report was released October of 2003, which included restatements for the years 2000 and 2001.

The total fraud at Ahold was revealed to be over $1 billion. Of this, approximately $856 million related to U.S. Foodservice. Upon conclusion of the forensic investigation, Ahold announced the creation of a task force reporting to the audit committee to address the internal control weaknesses and improper accounting practices uncovered during the investigation. (Ahold, 2003b). Ahold announced in their 2002 annual report that the internal audit department would now report directly to the CEO and the audit committee, rather than solely to the CEO, as was the case previously (Ahold, 2002a).

According to press releases from Ahold, after the accounting scandal, U.S. Foodservice made “substantial improvements in the company’s financial systems and controls, as well as its financial organization, to strengthen financial monitoring and reporting” (Ahold, 2004). They also established a new office of governance, ethics and compliance.

LESSONS LEARNED: AUDIT CONFIRMATIONS

            In designing the tests to be performed during an audit, an auditor must obtain adequate assurance to address audit risk. The greater the risk of a particular financial statement assertion (e.g., the existence and amount of vendor rebates), the more evidence an auditor should gather to support the assertion. Statement on Auditing Standards (SAS) No. 67 states that, “confirmation is the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions” (AICPA, 1992, SAS 67.06, AU 330). According to SAS No. 67, confirmation from an independent source is generally viewed as having greater reliability than evidence obtained solely from client personnel. Confirmation with a third party helps the auditor assess the financial statement assertions with respect to all five of management’s assertions: existence or occurrence, completeness, rights and obligations, valuation or allocation, and presentation and disclosure. The auditor may design a third party confirmation to address any one or more of these assertions (AICPA, 1992). However, existence is usually the primary assertion addressed by confirmation of receivables.

Even though evidence obtained by a third party confirmation is generally viewed as being more reliable than evidence provided by the entity being audited, SAS No. 67 cautions that an auditor should maintain a healthy level of professional skepticism. The auditor should consider information from prior years’ audits and audits of similar entities. Further, an auditor has an obligation to understand the arrangements and transactions between the audit client and the third party so that the appropriate confirmation request can be designed. SAS No. 67 states that “[i]f information about the respondent’s competence, knowledge, motivation, ability, or willingness to respond, or about the respondent’s objectivity and freedom from bias with respect to the audited entity comes to the auditor’s attention, the auditor should consider the effects of such

information on designing the confirmation request and evaluating the results, including determining whether other procedures are necessary” (AICPA, 2002, SAS 67.27). The statement allows for the possibility that the party responding to the confirmation may not be completely objective or free from bias and requires the auditor to use other evidence to confirm financial statement assertions in such cases (AICPA, 1992).

Confirming accounts receivable is a generally accepted auditing procedure and is required unless the amount involved is immaterial, a confirmation would be ineffective, or if the auditor can substantially reduce the level of audit risk of the financial statement assertion through the use of other substantive and analytical tests. Accounts receivable, for the purpose of SAS No. 67 (AU 330), represent claims against customers that have arisen in the normal course of business and loans held by financial institutions (AICPA, 1992). The Statement does not specifically address confirming a receivable that arises when a vendor owes a rebate to a reseller, a situation that differs substantially from the typical trade accounts receivable from a customer. Confirming vendor rebate receivables give rise to different risks that likely were not envisioned when the Statement was adopted in 1992.

In adopting SAS No. 67, two (of the seventeen) Board members, while assenting to the Statement, expressed a reservation that the language used in the Statement usurped the freedom of the auditor in exercising professional judgment in how best to confirm accounts receivable and that the language might also lead auditors to place undue reliance on third party confirmation when circumstances might suggest that the auditor choose a more effective test (AICPA, 1992). With the benefit of hindsight it is clear that the auditors of U.S. Foodservice could have, and should have, designed a more “effective test,” one that would have helped overcome the inherent weakness that existed in this situation where parties providing the confirmation may have either been uninformed about the existence and/or amount owed to the retailer or may have had a vested interest to overstate the amount that was owed to U.S. Foodservice. While some practitioner literature has made reference to biases of confirmation respondents (e.g., Simunic 1996), scant attention has been given to this particular concern regarding responses to auditor confirmations by vendors’ sales personnel.

THE AFTERMATH

In 2004, Timothy J. Lee and William F. Carter, both former purchasing executives for U.S. Foodservice, pleaded guilty to participating in the scheme and to conspiring with suppliers to mislead the company’s auditors. They later agreed to pay approximately $300,000 in civil penalties (Reuters, 2005).

More than a dozen U.S. Foodservice vendors pleaded guilty from 2003 to 2006 to criminal charges related to the fraud, admitting that they submitted false confirmations to the auditors (Bloomberg, 2006). Many other U.S. Foodservice employees and vendors have faced civil charges from the SEC, and most have agreed to pay fines without admitting guilt (Sterling, 2007).

In 2009, the SEC dropped the charges against the two former KPMG auditors charged with having engaged in improper conduct during the 1999 audit of U.S. Foodservice (SEC, 2009).

The auditors had been charged by the SEC in 2006 (SEC, 2006b).

PLEASE WRITE A CONCLUTION FOR THIS CASE STUDY RELATED TO THE AUDIT FAILURE.