Topic: Internal Control (Segregation of Duties)
Characters: John, Manager of Theatre Franchise; William, Assistant Manager of Theatre Diana, Staff Accountant of Franchise Jodi, Ticket seller and cashier Bob, Doorman
Diana is a college graduate with accounting as her major and is planning to take the CPA exam. She recently accepted the Staff Accountant’s position with the ZZ Cinema Franchise. There are 20 theatres that are owned by the Franchise in a widely spread geographic area.
John is manager of all the locations of the theatre franchise and William, distantly related to him, is the Assistant Manager working solely at his location. Jodi sells tickets from a glass cage and collects the cash from patrons. At the end of the last show, he adds up the cash receipts, reconciles his sales and hands over unsold tickets and cash to William. Bob, the doorman, collects the tickets from incoming patrons, tears the tickets into two, hands over one to the patron and drops the second half into a little locked box which William picks up at the end of the day. William prepares the bank deposit slip, deposits the cash in the bank, and keeps the bank receipts and the unsold tickets in the office safe to which he has the only key. William also prepares the bank reconciliation statements and submits weekly sales reports to Diana.
Of late, William has volunteered quite frequently to speed up ticket sales on crowded days by working Jodi’s station at the sales counter. John has not objected to this practice. During the past month William has been seen driving a fancy new Lexus to work and seen dining with an attractive blond at the town’s expensive restaurants. Diana finds from William’s reports that sales have shown no change from previous weeks, even though there appears to be an obvious and significant increase in movie theatre attendance during the summer season. This puzzles Diana, who suspects this apparent discrepancy is being pocketed by William. More puzzling, why hasn’t John also noticed this problem? Diana wonders if she should report her suspicions to someone in authority. After all, she has no proof. More importantly, should she go to John? He might be involved in this possible scam. What should she do?
Author: Hema Rao, CPA, DBA, Assistant Professor, School of Business, University of Wisconsin-Parkside
Co-author: Charles Alworth, Assistant Professor of Accounting, Texas A&I University
What Are the Relevant Facts?
- Diana is new on the job.
- Diana suspects William of siphoning off the extra sales revenue.
- She has no proof to back up her suspicions.
- William has been consuming conspicuously.
- John may not suspect William of wrongdoing.
- Poor internal control and a lack of segregation of duties exist.
- Evidently, franchise owners are not aware of the problem or trust John, who is their agent.
What Are the Ethical Issues?
- Does Diana have an obligation to protect the interests of the franchise owners?
- What effects will her blowing the whistle without any valid proof have on William, John, and herself?
- To what extent is Diana responsible for correcting the existing poor internal control situation?
- Should Diana discuss the problem with John?
- Should Diana collect more evidence against William?
Who Are the Primary Stakeholders?
- Owners of the franchise
What Are the Possible Alternatives?
- Confront William with her suspicions.
- Talk to John about her suspicions.
- Talk to the owners about her suspicions about William.
- Collect more proof.
- Do nothing.
What Are the Ethics of the Alternatives?
- Utilitarian approach:
- What are the benefits to the owners, John and Diana, if William is fired?
- What are the costs to the owners if William continues?
- What are the costs to the owners if William is fired even though he is innocent?
- What are the costs to Diana if she is wrong?
- What are the costs if Diana does nothing?
- Rights approach:
- Do the owners have a right to expect Diana to blow the whistle on William?
- Are William’s rights violated if Diana reports and he is innocent?
- Are the owner’s rights violated if Diana does not report and William is guilty?
- Are Diana’s rights violated if she is fired if the owners do not believe her for a lack of sufficient proof?
- Justice approach:
- Who are the parties that benefit if Diana does nothing?
- Is Diana justified in reporting William without valid proof of his wrong doing?
- Who has most to lose if Diana does nothing?
What Are the Practical Constraints?
- Diana may be fired if she is wrong.
- Diana may find it difficult to conduct an investigation without tipping off William about her suspicions and/or antagonizing him.
- Diana is new on her job and knows very little about William’s relationship with John and the owner’s trust in John.
- William may end up suing Diana for defamation of character if she cannot back up her accusations with proof.
- Obtaining proof seems to be a difficult job.
What Actions Should Be Taken?
- Should Diana report?
- Should she do nothing?
- Should she recommend remedial steps for poor 4. What ethical theory is most applicable to this internal control, etc., even though she has no situation? (utilitarian, rights, justice) specific responsibility to do so?