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Case 1-4
Lone Star School District
Jose and Emily work as auditors for the state of Texas. They have been assigned to the audit of the Lone
Star School District. There have been some problems with audit documentation for the travel and
entertainment reimbursement claims of the manager of the school district. The manager knows about the
concerns of Jose and Emily and he approaches them about the matter. The following conversation takes
place:
Manager: Listen, I’ve requested the documentation you asked for but the hotel says it’s no longer in their
system.
Jose: Don’t you have the credit card receipt or credit card statement?
Manager: I paid cash.
Jose: What about a copy of the hotel bill?
Manager: I threw it out.
Emily: That’s a problem. We have to document all your travel and entertainment expenses for the city
manager’s office.
Manager: Well, I can’t produce documents that the hotel can’t find. What do you want me to do?
NOTES
This is an excellent case to show students how individuals who are being audited can react to questions
from auditors. The auditors are just doing their jobs and requesting documentation as required. Although
this case did not mention it, materiality and relevancy could be called into play by the manager. The
manager paid cash and did not keep a receipt. The fact that the hotel cannot help by producing a receipt
may suggest a cover-up of some sort, in which materiality becomes mute.
Ethical Issues
The auditors are doing an audit of travel and expense reimbursements. Most states are very explicit about
what may be reimbursed, the type of receipt required and the maximum reimbursement by category. From a
rights perspective, the state, as a proxy for taxpayers, has a right to expect all of the employees of state
agencies to follow the rules. Most states will have a stated hotel rate and per diem rate that employees are
entitled to be reimbursed up to the maximum amount. State auditors will test expense accounts to see if
appropriate receipts were submitted. If an employee receives a reimbursement beyond the per diem
amount, it maybe considered theft by the state. The manager has a right to expect audit of the finances of
the school district. He should expect requests for documentation to be given in a professional manner and
with a reasonable timeframe to pull the files and documentation. The manager has a duty and obligation to
be honest and trustworthy in his job as a state employee.
From a fairness perspective the state should enforce all policies equally across all agencies and all
positions. The enforcement of policies by the state means that the manager can expect his reimbursement to
be treated fairly similar to all other reimbursements and should not have to produce documentation that is
not required.
Trustworthiness, respect, responsibility, and fairness are the values in this case from the Six Pillars of
Character. The manager should be honest, not deceive or steal. Both the manager and the state auditors
should be treated with respect, use of good manners, do not threaten anyone and deal peacefully with anger
and disagreements. Both should take responsibility for actions, be self-disciplined and accountable. Both
can expect fairness since the state rules and policies are part of public record and may even be part of
public law.
The manager is not acting as a credible manager. The auditors may be right to be suspicious of him paying
cash for a hotel and for hiding which hotel he was staying.
Questions
1. Assume Jose and Emily are CPAs and members of the AICPA. What ethical standards in the Code
of Professional Conduct should guide them in dealing with the manager’s inability to support
travel and entertainment expenses?
Jose and Emily should be guided by the principles of integrity, objectivity and independence. They should
2. Using Josephson’s Six Pillars of Character as a guide, evaluate the statements and behavior of the
manager.
The manager’s statements make him seem defensive and guilty. The statements do not exemplify the values
3.a. Assume Jose and Emily report to Sharon, the manager of the school district audit. Should they
inform Sharon of their concerns? Why or why not?
Yes, Jose and Emily should inform Sharon of their concerns. No supervisor likes surprises. Depending on
their experience level it may be very appropriate that they look to Sharon for guidance on what to do next.
b. Assume they don’t inform Sharon but she finds out from another source. What would you do if
you were in Sharon’s position?
Sharon should await for the results before doing too much; she should temper any reaction by the
experience level of Jose and Emily. Sharon should wonder if Jose and Emily understand the significance of
