978-0077862213 Case Solution Busyboto Scooter

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Busyboto Scooter Sales, Inc.

Busyboto Scooter Sales, Inc. is the largest manufacturer of scooter bikes in the

world. In 2003, the company announced a revolutionary scooter, a 250cc bike with

sporty styling and advanced electronic features, including the Busyboto B-Matic

transmission and the Busyboto Smart Card Key System. In its first full year of sales, the

Wassup X-777 sold 195,000 units in Asia alone. It began in the U.S. in 2004 and the

company sold 375,000, 450,000, and 600,000 units, respectively, in calendar years 2004

through 2006.

Customers seem to gravitate to the sleaky design of the Busyboto B-Matic

including a reduced cowl profile. The shapes of the inner stop lamps and turn signals

have been changed from a strange triangular shape to the more appealing round shapes

equipped with ten LEDs per side for increased visibility and sharp rear-view. The

scooters are the first in the world to be outfitted with an auto-shift mode and kick-down

gear shifter to create a unique driving experience finely tuned to driving conditions.

On January, 25, 2011 during the audit of the company’s calendar-year 2010

financial statements, Stu Forstman identified certain financial irregularities with respect

to activities of the U.S. subsidiary of Busyboto Scooter Sales. The irregularities concern

material payments made to influential people in the Central American country of

Zootsuitia to gain a contract to supply the country with 100,000 scooters by 2012.

Forstman convinced his superiors to accept the explanation of Hank Koosner, the officer

in charge of the Zootsuitia operation, despite evidence that contradicts these explanations

and indicates that the irregularities may be illegal.

This case deals with legal and ethical issues related to compliance with the FCPA, and

subordination of judgment by an auditor.

Ethical Issues

The audit team has found evidence that suggest that Busyboto Scooter is violating the

FCPA in Central American company. An auditor accepts management’s explanation,

which is contradictory of the evidence, and convinces that audit firm to accept the

explanations also. This could cause the firm to be liable under FCPA, Sarbanes Oxley and

for negligence.

The audit firm and auditor have a duty of care to conduct an audit in accordance with

GAAS and to plan and conduct the audit to provide reasonable assurance that the

financial statements are free of material misstatement, including illegal acts.

Questions

1. Do you think it is “right” for Congress to establish a law that controls the

actions of U.S. multinational entities while operating in foreign countries?

Why or why not? Is it ethical for a U.S. company to make questionable

payments to influential people and decision makers in a country in which it

does business? Describe the possible legal implications of the facts of the case

for the U.S. subsidiary of Busyboto Scooter sales under the Foreign Corrupt

Practices Act.

The Act exists to prevent a U.S. company from gaining an unfair advantage in

negotiations for foreign contracts by making inappropriate payments to foreign officials.

At the same it prevents a U.S. company from making payments in a foreign country and

deducting those payments for U.S. taxes, when if a similar payment was made in the U.S.

The laws of nations sometimes differ, but this does not mean that one nation is imposing

its ethical standards on another. To the extent that the U.S. has attempted to influence the

Foreign Corrupt Practices Act was designed to prevent corporate payments to high level

officials. Influencing a government official to act against fiduciary duty to people is

2. Distinguish between constructive fraud and actual fraud. What evidence, if

any, exists in this case that might indicate one or the other legal liability exists

for the auditors? Be specific and state any assumptions you made in

interpreting the facts of the case.

Fraud is the intentional misrepresentation of material fact to deceive another party.

Constructive fraud differs from fraud in that constructive fraud does not involve a

misrepresentation with the intent to deceive. Gross negligence on the part of auditors has

3. Assume that Forstman went to his superiors with a recommendation that a

complete investigation should be opened on how the company operates in

Zootsuitia including additional information that is independently obtained

on the questionable payments. After a brief meeting with his superiors,

Forstman is told in no uncertain terms to “let sleeping dogs lie.” Assume

Forstman is a CPA and member of the AICPA. What are his ethical

responsibilities under these circumstances?

The ethical issue for Forstman is does he go along with the firm on this matter or should

he try to do something to influence the firm’s position. If he supports the firm, will it be

an active and open expression of support or tacit approval? If he tries to change the firm’s

position, then how will he go about doing this? Accounting firms do not have boards of

4. Assume Forstman knows that the audit firm will not tolerate dissent on the

Zootsuitia issue. He is concerned that he will lose his job if he starts to rock

the boat. What would you do if you were in Forstman’s place? Why?

If Forstman knows that the firm will not tolerate dissent, he must decide if he can go

along with the decision or if he should leave the firm. If he can or must go along with the