Case 2-6
Supreme Designs, Inc.
Supreme Designs, Inc., is a small manufacturing company located in Detroit, Michigan. There are three
stockholders of the company—Gary Hoffman, Ed Webber, and John Sullivan. Hoffman manages the
business including the responsibility for the financial statements. Webber and Sullivan do most of the sales
work, and they cultivate potential customers for Supreme Designs.
Hoffman recently hired his daughter, Janet, to manage the office. Janet has successfully managed a small
clothing boutique in downtown Detroit for the past eight years. She sold the shop to a regional department
store that wanted to expand its operations. Gary Hoffman hopes that his daughter will take over as an
owner in a few years when he reaches retirement age. Webber and Sullivan are significantly younger than
Gary Hoffman.
Janet is given complete control over the payroll, and she approves disbursements, signs checks, and
reconciles the general ledger cash account to the bank statement balance. Previously, the bookkeeper was
the only employee with such authority. However, the bookkeeper recently left the company, and Hoffman
needed someone he could trust to be in charge of these sensitive operations. He did ask his daughter to hire
someone as soon as possible to help with these and other accounting functions. Janet hired Kevin
Greenberg shortly thereafter, based on a friend’s recommendation. Greenberg is a relatively inexperienced
accountant but he was willing to work for less than what the company had paid the former bookkeeper.
On April 29, 2014, about one year after hiring Greenberg, Janet discovers that she needs surgery. Even
though the procedure is fairly common and the risks are minimal, she plans on spending five weeks in
recovery because of related medical problems that could flare up if she returns to work too soon. She tells
Greenberg to approve vouchers for payment and present them to her father during this time, and her father
will write the checks during her absence. Janet had previously discussed this plan with her father and they
both agreed that Greenberg was ready to assume the additional responsibilities. They did not, however,
discuss the matter with either Webber or Sullivan.
The bank statement for April arrives on May 3, 2014. Janet did not tell Greenberg to reconcile the bank
statements. In fact, she specifically told him to just put those aside until she returns. However, Greenberg
decides to reconcile the April bank statement as a favor to Janet and to lighten her workload after she
returns.
Although everything appears to be in order, Greenberg is not sure what to make of his finding that Janet
approved and signed five checks payable to herself for the same amount during April 2014. Each check
appears in correct numerical sequence, 1 check of every 10 checks written during the month. Greenberg
was surprised because if these were payroll checks (as he had suspected because they were for the same
amount), it was highly unusual. This is because the payroll is processed once a month for all employees of
Supreme Designs. In fact, he found only one canceled check for each of the other employees including
himself.
Curiosity gets the better of Greenberg and he decides to trace the checks paid to Janet to the cash
disbursements journal. He looked for supporting documentation but couldn’t find any. He noticed that four
of the five checks were coded to different accounts including supplies, travel and entertainment, books and
magazines, and two to miscellaneous expenses.
After considering what his findings might mean and whether he should contact Janet, Greenberg decided
to expand his search. He reviewed the bank statements for January through March of 2014. In all, there
were 15 additional checks made payable to Janet, each for the same amount as the 5 in April. These 20
checks totaled $30,000. Greenberg still thought it was possible these amounts represented Janet’s salary
because he knows her annual salary is $50,000. Perhaps she took out a little more this year.
Greenberg doesn’t know what to do. He could contact Janet, but he knows she would be unhappy that he
opened the bank statements and went so far as to reconcile cash for April even though she specifically told
him not to do it. Perhaps he should contact the three stockholders. Then again, it may be best if he keeps
quiet about the entire matter.
NOTES
Because the manager of a small business has made checks out to herself on a regular and routine basis
suggests that the possibility of material irregularities exist in this case. The case is further complicated by
the fact that the manager is the daughter of one of the owner of the business. Misappropriation of resources
is the primary issue of this case. The ethical dilemma is presented from the point of view of Kevin
Greenberg, the young accountant who discovers the irregularity.
Instructors may want to extend the discussion in this case and provide some information to the students on
the existence and cost of fraud to global business. The Association of Certified Fraud Examiners puts out a
Report to the Nation in even numbered years. The summary of the 2012 Report to the Nation is discussed
in chapter 3.
Ethical Issues
The financial statements of Supreme Designs for the current year will be materially misstated if corrective
action is not taken, assuming that Janet Hoffman has written the improper checks all year long. The
misappropriation of funds by Janet Hoffman seems to constitute an illegal act. Additional information may
be needed in order to make this determination with certainty because it appears that Hoffman has the
authority to do almost anything that she wants. Nevertheless, the seriousness of the act raises concerns
about the integrity of management and reliability of internal controls. The latter clearly are inadequate
because there is no separation of duties, a critical component of internal control, in that one person, Janet
Hoffman, performs both the disbursement function and the reconciliation of the bank statement with the
general ledger cash account.
This case deals with the basic issue of honesty. Janet Hoffman has engaged in a dishonest act by
fraudulently writing checks that are payable to herself. Consequently, she has violated the trust placed in
her by her father. Kevin Greenberg becomes involved because he assumed some of Janet’s responsibilities
while she was hospitalized. Greenberg seems to know what the right thing to do is, but he may feel
constrained by the fact that he reports to Janet and Janet gave him strict instructions what to do and what
not to do and Greenberg did not follow them.
Greenberg owes his ultimate allegiance to the owners of Supreme Designs. Janet is not an owner. It is her
father that is part owner of the business. Greenberg should consider how Gary Hoffman might feel about
knowing that his trusted daughter has stolen from the company. He has a right to be informed about this,
and the other owners should know as well.
What Actually Happened
Greenberg disclosed his findings to Gary Hoffman who did not believe him at first. A meeting was called of
all the owners. Eventually, Hoffman was persuaded to accept what happened because of the convincing
evidence presented by Greenberg, and he fired his daughter. Years later it was discovered that Gary
Hoffman was selling miscellaneous inventory and company equipment that had little or no value on the
books. This created a great deal of tension between the owners. In discussions with Janet Hoffman it was
determined that she felt justified in her actions because she knew that her father had engaged in similar
activities.
Questions
1. Do you think Greenberg did the “right” thing by opening the April bank statement and
reconciling it to the general ledger? Why or why not? What about the previous bank statements?
Kevin was not authorized to open the bank statement and reconcile it to the general ledger. He had good
intentions and had lucky results. Ask students what they think would have happened if Kevin opened the
2. Explain what Greenberg should do if he reasons at each of the six stages of Kohlberg’s model of
moral development. Be sure to consider stakeholder effects in your answer.
Kevin is first faced with the fact that he cannot tell anyone without first admitting that he disobeyed his
instructions. Stage 1: Kevin would stay quiet as speaking up will cause trouble. Stage 2: Kevin would tell
the partners with the hope he will somehow be rewarded for his actions. Stage 3: Kevin might stay quiet as
to protect Janet and the possible negative effects for the company of the fraudulent actions of Janet. Stage
3. Evaluate what steps should be taken in each of the following independent situations:
a. If you were Janet and Greenberg dropped by the hospital to tell you about his discovery, how
would you react?
Janet may consider the following actions once Kevin tells her he knows about the misappropriations: 1) fire
him so he cannot tell without looking like a disgruntled employee motivated by revenge; 2) try to spin
b. Assume Greenberg contacts Janet’s father because he did not want to upset her after the
surgery. Hoffman talks to his daughter, who informs him that she had a shortage in her
personal funds and planned to repay the $30,000 after she returns. What would you do if you
were Gary Hoffman? Why?
Gary may want to give Janet a chance to reform herself. Gary may plan to pay the money back to the
In the short run, Gary may help his daughter by covering her losses. In the long run, he isn’t teaching her
c. Assume Hoffman does nothing because of his daughter’s explanation. Janet returns to work
and fires Kevin Greenberg. What would you do if you were Greenberg. Why? How do you think his
action (or inaction) might affect his opportunity for other jobs? Should that matter in terms of what
he decides to do?
Kevin’s choices are narrowed. Having been fired, if he tells anyone about the incident he may not be
believed and it may limit his chances of getting another job. Hopefully Kevin documented all that happened