ISSN 1940-204X
From Sparks to Fired: Ethical and Internal Control Violations
Surrounding Business Entertainment Expenses
M. Elizabeth Haywood
Rider University
Marge O’Reilly-Allen
Rider University
BACKGROUND
ways to decrease inefficiencies and waste. Moreover, the
new president’s goal was to accomplish this without massive
layoffs. The company’s overall mission was “to be honest,
fair, and responsible to our stockholders, to our employees,
and to our community.” He felt massive layoffs would go
against this philosophy.”
You are confused: “Then why do you think you would be
fired? It sounds like this guy does not want to get rid of people.”
“Well,” Sparky replies, “Our internal audit department
rotates divisions to be audited, and it was my division’s
turn this year. When the internal audit staff members
audited my sales district, they found numerous unethical
and questionable practices, mostly occasions when sales
staff entertained customers. They discovered most of the
problems when they audited the expense reports submitted
by my sales staff.”
“Like what?” you ask. Sparky shook his head and put his
hands over his face.
“Oh, geez,” he says, “where do I start? First, a salesperson
from Region A submitted meal receipts for ‘XYZ Charities.’
He and a particular customer—actually one of the company’s
largest—frequented this place a lot. At first the internal
auditors thought he was running charitable contributions
through the company. But when an auditor called the phone
number on the receipts, he found out the establishment was
a gentlemen’s club. When the auditors and I questioned the
salesperson about it, he said the customer pressured him to
go there and threatened to walk if he didn’t. The salesperson
knew the president wanted to maintain customers and gain
new ones, so he felt he had no choice.”
Michael Sparks, or “Sparky” as his friends call him, is the
manager of sales for the North Central District of a large,
publicly held consumer products company. He is also your
next-door neighbor. Always cheerful and smiling, he is the
type of neighbor most people long to have.
One day, you see Sparky taking out the trash and notice
his forlorn face and his somber step. You know immediately
something is gravely wrong. “Sparky, what is the matter?”
you ask. All he says as he puts the trash bag in the can is, “I
think I am going to be fired on Monday.”
You are taken aback. Sparky has been the leading
salesperson for this company for years. He not only still
has his own customers, but he also manages dozens of
salespeople under him. He has more “Best Boss” mugs in his
cupboard than anyone you knew. All you can ask is, “Why?”
THE PROBLEMS
Sparky relays the situation: “A year ago, the company hired
a new president to steer the company away from financial
peril—the current economy had created a cutthroat
environment for these types of consumer products. Our
company kept falling short of analysts’ forecasts, and the
stock price had fallen drastically until this president came
onboard. The new president not only wanted to maintain
the current level of sales, or increase it, but also wanted to
reduce costs. He asked employees to find ways to boost the
bottom line. He asked the internal audit staff to look for
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“Second,” Sparky barks, “came high ticket items such
as trips, concerts, and sporting events. One salesperson from
Region J was supposed to take another customer, who made
up almost 80% of her sales, on a ski trip to Jackson Hole.
It was supposed to be the customer and her family and my
salesperson and her family on the trip. At the last minute, the
customer’s kids came down with the flu, and my salesperson
took her own neighbors instead. She ran all expenses
through the company. When an auditor did not recognize the
names of the neighbors, she questioned this salesperson. My
salesperson said that the tickets were nonrefundable and if
she did not go, they would go to waste.”
“Then,” Sparky goes on, “other customers asked my
team to get them concert tickets—I mean $1,000 apiece,
front row tickets to U2. One of my staff members bought
season tickets to an NFL team and occasionally took a
customer, but mostly took his wife, brother-in-law, and sister.
Again, ran it all through the company.”
“Another instance involved allowance for meals,” Sparky
said. “Our company allows traveling salespeople to get $75
per day for meals and incidentals without having a receipt.
One of my guys ran through $74.95 every day he traveled—
for the past three years. Then, there was a salesperson
from Region Z who had a customer who always had huge
meal tickets, mostly because of wine. The internal auditor
understood that wine is often part of the meal, but the
amount of bottles for a couple of people seemed excessive.
When the internal auditor asked her about it, she said the
customer insisted on taking two or three unopened bottles of
wine home with him and including it on the bill. Then, there
was a case where one of my salespeople from Region T held
dinner meetings with a group of sales staff and clients, yet no
clients ever attended.”
You have to interrupt; your curiosity is getting the best of
you. “How did you find out there were no customers there?”
“Well,” Sparky replies, “The internal auditors did some
digging. These were large dinner bills, and there were a lot
of people at the dinner. The internal auditor couldn’t read
the names of some of the customers who were listed on the
bill—bad copy, I guess. He tried to get in touch with the
salesperson, but he was out of the country on vacation. So,
the internal auditor, wanting to wrap up this portion of the
audit, happened to contact the purchasing manager of the
company who attended the dinner to get the names of his
subordinates. Turns out, neither he nor his subordinates were
at that dinner. When the auditor looked into more dinner
receipts submitted by this same salesperson, the auditor
found that many times it was just the salesperson treating his
sales staff to dinner—no customers.”
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At this point, you are having a hard time believing all of
this. “Anything else?” you ask.
Sparky replies, “Actually, come to think of it, there
was one more instance uncovered by the internal auditors.
Given where my division is located, up here near Fargo and
Frostland, I had a couple of subordinates who had clients in
the U.S. and Canada. The salespeople traveling to visit U.S.
clients were told to send their expenses through my division
in the U.S. If the majority of their travel expenses related to
their Canadian customers, they send it to my counterpart in
Canada. Well, a salesperson in Region G would visit some
clients in the U.S. and then drive up to Canada and visit
some clients there. Instead of submitting the expenses either
to my division or to the Canadian division, she submitted
it to both of us. I cannot tell you how many times she did
that—got reimbursed twice for the same expenses. I fired
her on the spot; I was furious. I also fired the guy who lied
about having clients attend those dinners.
“But, in these other instances, my team said they knew
what a competitive environment it was and felt pressured
to do what the customers wanted, or they would lose the
customers’ business. They felt that these expenses were just
a small price the company paid to gain millions of dollars in
sales. So, the human resources director is looking at their
personnel records and will make the call on them. That’s out
of my hands. Meanwhile, I am meeting with my boss, the
vice president of sales and marketing, and the internal audit
team on Monday. My boss is flying in bright and early Monday
morning. She is getting serious heat and pressure from the
president. She basically told me to come up with some
solutions to these problems or kiss my ‘comfy’ job goodbye.”
You just stand there thinking. While you never had
worked as an external or internal auditor, you had studied
auditing in college and, more recently, reviewed internal
controls for the CMA® (Certified Management Accountant)
exam last year. In fact, the topic of internal controls was a
significant portion of the first part of the exam. Two things
keep bugging you through Sparky’s account of events: (1)
Who was reviewing these expense accounts? and (2) What
did the company’s code of ethics say about things like this?
So, you ask Sparky.
“Geez,” Sparky says, “I was supposed to be reviewing
these items, I guess. I mean, I had that responsibility, but
I was also managing my team and my own customers, so I
delegated it to my administrative assistant. I sat down with
her for a whole day about things to look for. I told her to
bring anything questionable to me, and I would look at it.
When I asked her about these situations, she said she felt
bullied by the salespeople. She said when she asked the
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salesperson from Region A about the XYZ Charities receipts,
he yelled at her and said, ‘You don’t know what you are
talking about. Mind your own business and leave me alone to
drum up sales to cover your salary!’ After that, she got scared
to inquire about anything else and just signed my initials on
anything and everything. So, I can understand why my boss
will probably fire me. I shirked on my duties.
“As far as the code of ethics, the company came up with
one to comply with SOX in 2003. But it was really geared
toward those higher-up finance execs. Most of the rest of us
in the company ignored it because it really did not apply to
us. Like I told you, the company’s overall mission was ‘to
be honest, fair, and responsible to our stockholders, to our
employees, and to our community.’ I always abided by that.
I trusted my team to do the same.”
“So what are you going to do, Sparky?” you ask.
Sparky replies, “I guess take my lumps and my pink
slip on Monday. I do not know where I would even begin
to suggest ways to fix these problems. My fear is finding
another job around here, especially in sales. I worked my
way up through the company since college. It is not like I am
going to get a stellar recommendation from them, anyway,
after this mess.” He looked ashen at this point.
exactly what the internal auditors want to discuss on Monday,
but you are going to beat them to the punch. Second, we
are going to specifically describe how these internal control
weaknesses are also ethical violations to your company’s
overall mission and recommend that a formal code of ethics
be implemented that applies to all employees, not just the
top ranks. You could take the initiative, and list some specific
standards that your company might want to use in its code
of ethics. The organization I belong to, IMA® (Institute of
Management Accountants), has a code of ethics called the
IMA Statement of Ethical Professional Practice that has four
overarching ethical principles: Honesty, Fairness, Objectivity,
and Responsibility—three of them are the same as in your
company’s mission statement. While IMA gears its principles
and standards toward financial professionals, I believe all of
the principles and many of the standards would apply to sales
personnel and others at your company. In fact, some of the
internal auditors might be IMA members; you can tell them
that your recommendations are based off of the IMA Statement,
IMA being a highly respected organization. Also, write
down anything else you think might help and we will try to
incorporate it into the presentation. I will see you tomorrow.”
REQUIRED
A POSSIBLE SOLUTION?
1.The Committee of Sponsoring Organizations of the
“Well, Sparky,” you say, “I am not sure it will help or not, but
your boss said to come up with some solutions. Instead of
giving up, you might as well try, and I am going to help you.
Let me take some time to think about these things, and I can
meet you tomorrow (Sunday). We can work all night if we
have to in order to come up with a presentation to give to your
boss and the internal auditors that addresses these issues.”
Sparky is taken aback, but some color starts to return to
his face. “What are you thinking?”
“Well,” you answer, “first, we are going to come up with
some recommendations for these internal control weaknesses
surrounding business entertainment expenses. This might be
Treadway Commission (COSO) Enterprise Risk
Management (ERM)—Integrated Framework (2004) is
a guideline for managing risk and understanding internal
controls. Describe the eight components of the COSO
ERM Framework.
2.Using the applicable COSO components, identify the
internal control weaknesses in the case and provide
recommendations to prevent or minimize their
recurrence in the future.
The following might be one solution:
COSO ERM Component
Internal Control Weakness
Recommendation
Internal Environment
Lack of standard code of ethics for all employees
Integrity starts with top management, and the more management supports and communicates
the importance of ethical behavior, the more likely employees will internalize it as part of
company culture. Management should establish and communicate a company-wide code of
ethics (rather than a code for executives that just complies with Section 406 of SOX).
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4.What is the relationship between a strong internal control
3. Given the IMA Statement and the problems surrounding
environment and ethical behavior?
business entertainment and travel expenses in the case,
list the relevant principles and standards that have been
violated by the company’s employees, and cite specific
examples to justify your answer. For example, the
following might be one solution:
Principle Violated
Example
Honesty – Requires conscientious application to the task at hand and truthfulness in
all analyses and communications.
Sales personnel lied on expense reports in order to have meals approved and submitted
duplicate expenses for reimbursement.
ABOUT IMA®
With a worldwide network of more than 65,000 professionals,
IMA (Institute of Management Accountants) is the world’s
leading organization dedicated to empowering accounting
and finance professionals to drive business performance.
IMA provides a dynamic forum for professionals to advance
their careers through CMA® (Certified Management
Accountant) certification, research, professional education,
networking, and advocacy of the highest ethical and
professional standards. For more information about IMA,
please visit www.imanet.org.
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