solution

Assume Vick and Ethan are CPAs. Ethan Lester was seen as a
“model employee” who deserved a promotion to CFO, according to
Kelly Fostermann, the CEO of Fostermann Corporation, a
Maryland-based, largely privately held company that is a prominent
global designer and marketer of stereophonic systems. Kelly
considered Lester to be an honest employee based on performance
reviews and his unwillingness to accept the promotion, stating that
he wasn’t ready yet for the position. Little did she know that
Lester was committing a $50,000 fraud during 2015 by embezzling
cash from the company. In fact, no one seemed to catch on because
Lester was able to override internal controls. However, the
auditors were coming in and to solidify the deception, he needed
the help of Vick Jensen, a close friend who was the accounting
manager. Lester could “order” Jensen to cover up the fraud but
hoped he would do so out of friendship and loyalty. Besides, Lester
knew Jensen had committed his own fraud two years ago and covered
it up by creating false journal entries for undocumented sales,
returns, transactions, and operating expenses.

Lester went to see Jensen and explained his dilemma. He could
see Jensen’s discomfort in hearing the news. Jensen had thought he
had turned the corner on being involved in fraud after he quietly
paid back the $20,000 he had stolen two years ago. Here is how the
conversation went.

“Vick, I need your help. I blew it. You know Mary and I split up
10 months ago.”

“Yes,” Vick said.

“Well, I got involved with another woman who has extravagant
tastes. I’m embarrassed to say she took advantage of my weakness
and I wound up taking $50,000 from company funds.”

“Ethan, what were you thinking?”

“Don’t get all moral with me. Don’t you recall your own
circumstances?”

Vick was quiet for a moment and then asked, “What do you want me
to do?”

“I need you to make some entries in the ledger to cover up the
$50,000. I promise to pay it back, just as you did. You know I’m
good for it.”

Vick reacted angrily, saying, “You told me to skip the bank
reconciliations—that you would do them yourself. I trusted
you.”

“I know. Listen, do this one favor for me, and I’ll never ask
you again.”

Vick grew increasingly uneasy. He told Ethan he needed to think
about it … his relationship with the auditors was at stake.

1.) Analyze the facts of the case using the Fraud
Triangle. Would you characterize what Ethan Lester did as a failure
of internal controls? Explain.

2.) Assume Ethan sets a meeting with Vick in two days to
follow-up on his request. Vick has decided not to be part of the
cover-up. Use the GVV framework to help Vick prepare for the
meeting. Consider the Following:

– What should Vick say to counteract Ethan’s
request?

– How might Vick’s intended action affect the company
and the external auditors?

– Who can Vick go to for support?

3.) Assume Ethan gets upset after the meeting and
decides to fire Vick. He tells Vick to leave quietly or Ethan will
disclose the $20,000 fraud. What should Vick do next?