ACCTG 630 SDSU United Thermostatic Controls & Olympus Case Study Questions Requirements for Part 1 and 2: Answer all questions to receive full credit. Be

ACCTG 630 SDSU United Thermostatic Controls & Olympus Case Study Questions Requirements for Part 1 and 2:

Answer all questions to receive full credit. Be sure to support and explain your answers. Your writing should be a meaningful response (i.e., with analysis) to each of the questions are required.

1) Address each question in a separate paragraph. 2) Consider using “because” in your answer, because it responds to the “why” (or “explain”) I usually also ask, and it typically precedes an analysis supporting your conclusion.

PART 1

Case 3-3: United Thermostatic Controls

CASE QUESTIONS:

1. Identify the stakeholders in the case and their interests.

2. Describe the ethical and professional responsibilities of Tony Cupertino.

Assume you are in Tony Cupertino’s position and know you have to do something about the improper accounting in the Southern sales division. Consider the following in crafting a plan how best to voice your values and take appropriate action:

3. How can you get it done effectively and efficiently?

4. What do you need to say, to whom, and in what sequence?

5. What will the objections or pushback be?

6. What would you say next? What data and other information do you need to make your point and counteract the reasons and rationalizations you will likely have to address?

PART 2

Case 3-7: Olympus

CASE QUESTIONS:

1. Does it seem reasonable that Olympus engaged in an accounting fraud for so long and the auditors did not detect it? Were the transactions in question and accounting for them something that should have been detected earlier through proper accounting procedures? Explain.

2. What caused the failure of the auditors to act on the fraud? Explain.

3. Evaluate the corporate culture at Olympus, including corporate governance. What were the shortcomings? What do you think caused them?

4. Do you believe Michael Woodford did the right thing by blowing the whistle on accounting irregularities? Were there other options open to him? Explain.

5. Once Michael Woodford was fired, could he have made a whistleblower’s claim with the SEC under Dodd-Frank? Why or why not? Case 3-3 United Thermostatic Controls (a GVV case)
United Thermostatic Controls is a publicly owned company that engages in the manufacturing and marketing of residential and Page 188
commercial thermostats. The thermostats are used to regulate temperature in furnaces and refrigerators. United sells its product
primarily to retailers in the domestic market, with the company headquartered in Detroit. Its operations are decentralized according to
geographic region. As a publicly owned company, United’s common stock is listed and traded on the NYSE. The organization chart for United
is presented in Exhibit 3.1.
EXHIBIT 1 United Thermostatic Controls Organization Chart
Board of Directors
Audit Committee
CEO and President
Corporate
Counsel
Director of
Human Resources
VP of Operations
Chief Financial Officer
Executive VP of
Sales & Marketing
Sam Lorenzo
Walter Hayward
Controller
Treasurer
Internal Auditing
Tony Cupertino,
Director
U.S.A.
Sales Division
Western
Sales Division
Eastern
Sales Division
Southern
Sales Division
Frank Campbell,
Director
*Member of the board of directors.
EXHIBIT 3 United Thermostatic Controls-Sales Revenue, 2018 (4Qs)
Budgeted and Actual Sales Revenue in 2018
U.S.A. Sales Division
Western Sales Division
Quarter Ended
Budget
Actual
% Var.
Budget
Actual
% Var.
March 31
$ 632,000 $ 638,000.009%
886,000 $ 898,000
.014%
640,000
642,000.003
908,000
918,000
.011
June 30
September 30
December 31
648,000
656,000 .012
930,000
936,000
.006
656,000
662,000 .009
952,000
958.000
.006
2018 Totals
$ 2,576.000 $ 2.598.000 .009% $3.676,000 $3,710,000
.009%
Eastern Sales Division
Southern Sales Division
Quarter Ended
Budget
Actual
% Var.
Budget
Actual
% Var.
March 31
$ 743,000 $ 750,000.009%
688,000 $ 680,000 (012)%
June 30
752,000
760,000 .011
696,000
674,000 (032)
761,000
769.000 .011
704,000
668,000 (051)
September 30
December 31
2018 Totals
770,000
778.000 .010
712,000
792.000
.112
$3,026,000 $3,057,000 .010% $2.800,000 $2,814,000.005%
During the course of their test of controls, the internal audit staff questioned the appropriateness of recording revenue of $150,000 on two
shipments made by the Southern division in the fourth quarter of the year. These shipments are described as follows:
1. United shipped thermostats to Allen Corporation on December 31, 2018, and billed Allen $85,000, even though Allen had specified a
delivery date of no earlier than February 1, 2019, to take control of the product. Allen intended to use the thermostats in the heating system
of a new building that would not be ready for occupancy until March 1, 2019.
2. United shipped thermostats to Bilco Corporation on December 30, 2018, in partial (one-half) fulfillment of an order. United recorded
$65,000 revenue on that date. Bilco had previously specified that partial shipments would not be accepted. Delivery of the full shipment had
been scheduled for February 1, 2019.
During their investigation, the internal auditors learned that Campbell had pressured United’s accounting department to record these two
shipments early to enable the Southern division to achieve its goals with respect to the company’s revenue targets. The auditors were concerned
about the appropriateness of recording the $150,000 revenue in 2018 in the absence of an expressed or implied agreement with the customers
to accept and pay for the prematurely shipped merchandise. The auditors noted that, had the revenue from these two shipments not been
recorded the Southern division’s actual sales for the fourth quarter would have been below the budgeted amount by $70,000, or 9.8 percent.
Actual sales revenue for the year ended December 31, 2018, would have been below the budgeted amount by $136,000, or 4.9 percent. The
revenue effect of the two shipments in question created a 5.4 percent shift in the variance between actual and budgeted sales for the year. The
auditors felt that this effect was significant with respect to the division’s revenue and earnings for the fourth quarter and for the year ended
December 31, 2018. The auditors decided to take their concerns to Tony Cupertino, director of the internal auditing department. Cupertino is
a licensed CPA
Frank Campbell is the director of the Southern sales division. Worsening regional economic conditions and a reduced rate of
Page 189
demand for United’s products have created pressures to achieve sales revenue targets set by United management nonetheless. Also,
significant pressures exist within the organization for sales divisions to maximize their revenues and earnings for 2018 in anticipation of a
public offering of stock early in 2019. Budgeted and actual sales revenue amounts, by division, for the first three quarters in 2018 are presented
in Exhibit 2.
EXHIBIT 2 United Thermostatic Controls-Sales Revenue, 2018 (1st 3Qs)
Budgeted and Actual Sales Revenue First Three Quarters in 2018
U.S.A. Sales Division
Western Sales Division
Quarter Ended
Budget
Actual
% Var.
Budget
Actual
% Var.
March 31
$ 632.000 $ 638,000
.009% $ 886,000 $ 898.000
.014%
June 30
640,000
642,000.003
908,000
918,000
011
September 30
648.000
656.000
.012
930.000
936.000
.006
Through September 30 $ 1,920,000 $1,936,000.008% $2,724,000 $2,752,000
.010%
Eastern Sales Division
Southern Sales Division
Quarter Ended
Budget
Actual
% Var.
Budget
Actual
% Var.
March 31
$ 743,000 $ 750,000.009% $ 688,000 $ 680,000 (012)%
June 30
752,000 760,000 .011 696,000 674,000 (032)
September 30
761.000 769,000 .011 704.000 668.000 (051)
Through September 30 $2,256,000 $2,279.000 .010% $2,088,000 $2,022,000 (032)%
Campbell knows that actual sales lagged even further behind budgeted sales during the first two months of the fourth quarter. He also knows
that each of the other three sales divisions exceeded their budgeted sales amounts during the first three quarters in 2018. He is very concerned
that the Southern division has been unable to meet or exceed budgeted sales amounts. He is particularly worried about the effect this might
have on his and the division managers’ bonuses and share of corporate profits.
In an attempt to improve the sales revenue of the Southern division for the fourth quarter and for the year ended December 31, 2018, Campbell
reviewed purchase orders received during the latter half of November and early December to determine whether shipments could be made to
customers prior to December 31. Campbell knows that sometimes orders that are received before the end of the year can be filled by December
31, thereby enabling the division to record the sales revenue during the current fiscal year. It could simply be a matter of accelerating
production and shipping to increase sales revenue for the year.
Reported sales revenue of the Southern division for the fourth quarter of 2018 was $792,000. This represented an 18.6 percent increase over
the actual sales revenue for the third quarter of the year. As a result of this increase, reported sales revenue for the fourth quarter exceeded the
budgeted amount by $80,000, or 11.2 percent. Actual sales revenue for the year exceeded the budgeted amount for the Southern division by
$14,000, or 0.5 percent. Budgeted and actual sales revenue amounts, by division, for the year ended December 31, 2018, are presented in
Exhibit 3.
100
December 31, 2018. The auditors decided to take their concerns to Tony Cupertino, director of the internal auditing department. Cupertino is
a licensed CPA
Cupertino discussed the situation with Campbell. Campbell informed Cupertino that he had received assurances from Sam Lorenzo, Page 191
executive vice president of sales and marketing, that top management would support the recording of the $150,000 revenue because
of its strong desire to meet or exceed budgeted revenue and earnings amounts. Moreover, top management is very sensitive to the need to meet
financial analysts’ consensus earnings estimates. According to Campbell, the company is concerned that earnings must be high enough to meet
analysts’ expectations because any other effect might cause the stock price to go down. In fact, Lorenzo has already told Campbell that he did
not see anything wrong with recording the revenue in 2018 because the merchandise had been shipped to the customers before the end of the
year and the terms of shipment were FOB shipping point.
At this point, Cupertino is uncertain whether he should take his concerns to Walter Hayward, the CFO, who is also a member of the board of
directors, or take them directly to the audit committee. Cupertino knows that the majority of the members of the board, including those on the
audit committee, have ties to the company and members of top management. Cupertino is not even certain that he should pursue the matter
any further because of the financial performance pressures that exist within the organization. However, he is very concerned about his
responsibilities as a CPA and obligations to work with the external auditors who will begin their audit in a few weeks. It is at this point that
Cupertino learns from Campbell that the CFO of Bilco agreed to accept full shipment when the goods arrive in return for a 20 percent
discount on the total price that would be paid on February 1, 2019. Cupertino asked Campbell how he had found out. It seems Campbell took
the initiative to help solve the revenue problem by going directly to the Bilco CFO.
Accounting Explanations
Olympus hid a $1.7 billion loss through an intricate array of transactions.
A one-paragraph summary of what it did appears in the investigation report:
The lost disposition scheme is featured in that Olympus sold the assets that incurred loss to the funds set up by Olympus itself, and later
provided the finance needed to settle the loss under the cover of the company acquisitions. More specifically, Olympus circulated money
either by flowing money into the funds by acquiring the entrepreneurial ventures owned by the funds at the substantially higher price than
the real values, or by paying a substantially high fee to the third party who acted as the intermediate in the acquisition, resulting in
recognition of a large amount of goodwill, and subsequently amortized goodwill recognized impairment loss, which created substantial loss.
Here is a more understandable version of the event:
Olympus indirectly loaned money to an off-the-books subsidiary and then sold the investments that had the huge losses to the subsidiary at
historical cost, eventually paying a huge premium to buy some other small companies and writing off the underwater investments as if they
were goodwill impairments.
A more detailed bookkeeping analysis of the complicated transactions appears in Exhibit 1.
Page 198
EXHIBIT 1
Detailed Bookkeeping Analysis of Olympus’s Accounting Fraudz
PHASE 1
Transaction 1:
This is a summary of a complex move-it involved purchasing a certificate of deposit (CD) at several banks that were asked to
loan the money back to an unrelated entity, with the CD as collateral, so the subsidiary can buy investments from Olympus.
Note: According to the investigative committee’s report, three banks were involved through the course of the whole project:
Commerzbank, LGT, and Société Générale. The committee’s report indicates that all three banks agreed to Olympus’s request
not to tell the auditors about the CDs being collateral for a loan.
(Olympus books)
DR Certificate of deposit
CR Cash
(CD purchase at banks; banks loan it to unconsolidated subsidiary)
(Unconsolidated subsidiary books)
DR Cash
CR Note payable to banks
(Cash from banks; collateralized by Olympus)
Transaction 2:
(Olympus books)
DR Cash
CR Financial assets (Investments)
(Proceeds from selling underwater investments to unconsolidated subsidiary; may have triggered gain on sale)
(Unconsolidated subsidiary books)
DR Financial assets (Investments)
CR Cash
(To buy underwater investments from Olympus)

Purchase answer to see full
attachment