Fundamentals of Cost Accounting
6th Edition
ISBN: 9781260708783
Author: LANEN, William
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Textbook Question
Chapter 12, Problem 52P
Incentives, Illegal Activities, and Ethics
An article in The Wall Street Journal indicated that dressmaker Fallo Me (name changed) backdated invoices to record revenue in the quarter before sales were actually made. As long as sales remained strong, the practice went undetected. When a recession hit retailers, however, revenue sagged and it became more difficult to cover one quarter’s shortfall with anticipated revenue from the next quarter.
Fallo Me’s compensation plan included bonuses for the chief operating officer and the chief financial officer if the company’s net income reached $16 million (approximately 2 percent of sales). The company reported a net income of $23 million, and the two executives received bonuses.
The fraud occurred away from corporate headquarters (in New York) at the company’s Cleveland, Ohio, office where the company’s financial affairs are handled. Fallo Me’s chief financial officer was establishing something of an autocratic rule in Cleveland. What the growing operation lacked in organization, he evidently tried to make up through frenzied effort. Employees say they were sometimes pushed to work 16-hour days, including many weekends and holidays, and were sometimes reprimanded for arriving as little as two minutes late to work.
The chief executive officer of the company was paid $3.6 million, mostly in the form of a bonus. He stated that he was bewildered by the accounting scandal. “We just don’t know why they would do it,” he said of the mid-level employees whose scheme concealed Fallo Me’s sliding fortunes.
Required
- a. Describe how the invoice backdating could have affected reported profits. Would those profits have been overstated permanently or just for a period?
- b. What effect might the bonus plan for the chief operating officer and chief financial officer have had on the fraud, if any?
- c. How might the location of financial operations in Cleveland, instead of at corporate headquarters in New York, have made it easier for someone to commit fraud?
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Chapter 12 Solutions
Fundamentals of Cost Accounting
Ch. 12 - What does decentralization mean in the context of...Ch. 12 - Why is performance measurement an important...Ch. 12 - Prob. 3RQCh. 12 - What does dysfunctional decision making refer to?Ch. 12 - Prob. 5RQCh. 12 - What are the five basic kinds of decentralized...Ch. 12 - What is goal congruence? How is it different from...Ch. 12 - Prob. 8RQCh. 12 - What is relative performance evaluation?Ch. 12 - Prob. 10RQ
Ch. 12 - Prob. 11RQCh. 12 - Prob. 12RQCh. 12 - The management control system collects information...Ch. 12 - Salespeople are often paid a commission based on...Ch. 12 - Prob. 15CADQCh. 12 - Prob. 16CADQCh. 12 - On December 30, a manager determines that income...Ch. 12 - Prob. 18CADQCh. 12 - Prob. 19CADQCh. 12 - The manager of an operating department just...Ch. 12 - In the previous chapters, we considered different...Ch. 12 - A company has a bonus plan that states that...Ch. 12 - Prob. 23CADQCh. 12 - Prob. 24CADQCh. 12 - Prob. 25CADQCh. 12 - Prob. 26CADQCh. 12 - Prob. 27CADQCh. 12 - Prob. 28CADQCh. 12 - Prob. 29ECh. 12 - Evaluating Management Control SystemsEthical...Ch. 12 - Prob. 31ECh. 12 - Management Control Systems and Incentives A...Ch. 12 - Prob. 33ECh. 12 - Prob. 34ECh. 12 - Prob. 35ECh. 12 - Alternative Allocation Bases: Service Bartolo...Ch. 12 - Prob. 37ECh. 12 - Single versus Dual Rates: Ethical Considerations A...Ch. 12 - Single versus Dual Rates
Using the data for the...Ch. 12 - Alternative Allocation Bases Thompson Aeronautics...Ch. 12 - Tone at the Top, Ethics Once upon a time, a major...Ch. 12 - Prob. 42ECh. 12 - Prob. 43ECh. 12 - Internal Controls Commonly in many organizations,...Ch. 12 - Evaluating Management Control Systems SPG Company...Ch. 12 - Analyze Performance Report for Decentralized...Ch. 12 - Divisional Performance Measurement: Behavioral...Ch. 12 - Prob. 48PCh. 12 - Prob. 49PCh. 12 - Cost Allocations: Comparison of Dual and Single...Ch. 12 - Cost Allocation for Travel Reimbursement Your...Ch. 12 - Incentives, Illegal Activities, and Ethics An...
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