Question

Controllership in Accounting

Topic:   Revenue & Misrepresentation by Clients

Characters: Rachel Hanson, Senior in CPA firm

Jim Thompson, Owner/manager of Fashion Line

Sharon, part-time bookkeeper of Fashion Line

In addition to the usual mix of compilation, review and audit clients for which Rachel Hunt

serves as a senior in a small office of a regional CPA firm, she has been assigned a new

client that recently engaged the firm. Fashion Line, an incorporated retail outlet, is a thriving

local store. The business is run by a single owner/manager, Jim Thompson, who makes

all major decisions. The business has not previously used the services of a CPA firm. In

addition to preparation of financial statements, the CPA firm will handle tax returns for the

business.

At her Line visit to the client’s office, Rachel is introduced to Sharon, the part-time

bookkeeper who is also a full-time accounting student at the local university. At a

subsequent meeting, Sharon confides to Rachel that she found the job at the beginning of the

semester after an extensive search. Sharon really needs the money to help finance her

education, and feels lucky to have found a good-paying job during the current economic

downturn. Feeling that Rachel is someone she can talk to and get advice from, Sharon

describes a situation that has been on her mind for some time now.

Sharon’s concern relates to the handling of sales revenues. When monies from sales revenues

are counted and deposited on a weekly basis, a chart is filled out with categories carefully

delineating the type of payment: cash, checks, American Express, or Visa/Mastercard.

Sharon’s employer, after depositing the weekly total, brings this chart back with his own

written-in total of the actual amount deposited.

After looking over some of these weekly deposit chats, Sharon noticed that $500 cash was

missing from each deposit. After a more thorough inspection of monthly tax documents that

Jim Thompson has filled out, Sharon noticed that the reported monthly gross revenue was

$2,000 less than what had been actually counted.

The employer is the only person handling the money after it has been counted. He is also the

only one to deposit the money. When Sharon asked Mr. Thompson about revenue not being

reported for tax purposes, he assured her that every dollar of income was reported on the tax

forms. Furthermore, Jim asserted, since Sharon wasn’t the person who signed the forms,

she shouldn’t be concerned.

Answer the following question from the case above :-

1. What are the relevant facts of the case?

2. What, if any, are the ethical issues?

3. Who are the stakeholders?

4. What are the possible alternatives including any ethical concerns?

5. What are the practical constraints?

6. What action(s) should be taken?

Answer 1

1. Rachel who works for a CPA firm has been assigned a new client Fashion line which is a retail outlet. Rachel's firms' responsibility would be the preparation of financial statements and tax returns for Fashion Line. Fashion Line has not used the services of a CPA firm before.

On her first visit to Fashion Line, Rachel meets Sharon, the part-time bookkeeper at Fashion Line and a full-time accounting student at the local university. Sharon informs Rachel that she has to come to know of discrepancies in the reported revenues, which was lower than the actual values. This process is handled by Mr Thompson, the owner of Fashion Line. When Sharon inquired to Mr Thomson on her finding, she was told by Mr Thompson that there was nothing and she should not be concerned about it as she does not sign the forms or handles the process.

2. The ethical issue in the case is for Rachel that whether should she believe in what Sharon has told her or should disregard her opinion as Sharon is still a student and not a season professional. If she goes ahead and asks Mr Thompson on Sharon's findings, she may risk getting a bad image of her company in front of a new client.

3. The stakeholders are Rachel, Sharon and Mr Thompson. Rachel and Mr Thompson are direct stakeholders and Sharon since she could get affected if Mr Thompson comes to know what she has told Rachel.

4. The possible alternatives are:

a) Rachel asks Mr Thompson about Sharon's findings.

b) Rachel takes cognizance of Sharon's findings and decides to get into the details. She does not inform Mr Thompson about Rachel findings and decides to do it only when she is sure after getting into the details.

c) Rachel ignores Sharon's findings altogether

5. The practical constraint for Rachel is that if she confronts Mr Thompson with Sharon's findings, she may end up losing new customer's faith. This could have an adverse impact on her as well as her company.

6. The best action would be that Rachel acts judiciously. She should take note of Sharon's findings but not jump to any conclusion. She should continue her work with her new customer like normal but get into the details of financial transactions to know if there are any discrepancies. Only when she finds discrepancies, she should put the matter forward to Mr Thompson.