Case 4-3
Family Games, Inc.
“Yeah, I know all of the details weren’t completed until January 2, 2014, but we agreed on the transaction
on December 30, 2013. By my way of reasoning it’s a continuation transaction and the $12 million revenue
belongs in the results for 2013.” This comment was made by Carl Land, the CFO of Family Games, Inc.
The company has annual sales of about $50 million from a variety of manufactured board and electronic
games that are designed for use by the entire family. However, during the past two years the company
reported a net loss due to cost-cutting measures that were necessary to compete with overseas
manufacturers and distributors.
Land made the previous comment to Helen Strom, the controller of Family Games, after Strom had
expressed her concern that since the lawyers did not sign off on the transaction until January 2, the revenue
should not be recorded in 2013. Strom emphasized that the product was not shipped until January 2 and
there was no way of justifying its inclusion in the previous year’s operating results.
Land felt Strom was being hypertechnical because the merchandise had been placed on the carrier
(truck) on December 31, 2013. The items weren’t shipped until January 2 because of the holiday. “Listen,
Helen, this comes from the top,” Land said. “The big boss said we need to have the $12 million recorded in
the results for 2013.”
“I don’t get it,” Helen said to Land. “Why the pressure?”
“The boss wants to increase his performance bonus by increasing earnings in 2013. Apparently, he lost
some money in Vegas over the Christmas weekend and left a sizable ‘I Owe U’ at the casino,” Land
responded.
Helen shook her head in disbelief. She didn’t like the idea of operating results being manipulated based
on the personal needs of the CEO. She knows that the CEO has a gambling problem. It had happened
before. The difference this time is it has the prospect of affecting the reported results and she is being asked
to do something that she knows is wrong.
“I can’t change the facts,” Helen said.
“All you have to do is backdate the sales invoice to December 30 when final agreement was reached,”
Land responded. “As I said before, just think of it as a revenue-continuation transaction that started in 2013
and, but for one minor technicality, should have been recorded in 2014.”
“You’re asking me to ‘cook the books,’” Helen said. “I won’t do it.”
“I hate to play hardball with you, Helen, but the boss authorized me to tell you he will stop reimbursing
you in the future for child care costs so that your kid can have a live-in nanny 24-7, unless you are a team
player on this issue. Remember, Helen, “this is a one-time request only.” Land said.
Helen was surprised by the threat and dubious of the one-time-event explanation. She sat down in her
chair and reflected on the fact that the reimbursement payments are $35,000, 35 percent of her annual
salary. She is a single working mother. Helen knows there is no other way that she can afford to pay for the
full-time care needed by her autistic son.
NOTES
This case discusses improper revenue recognition. This case is further complicated by a personal situation
of the controller.
Ethical Issues
The case looks at the integrity of the controller and CFO of Family Games, and whether they will
subordinate their judgment given pressures and threats. The gambling habit of the boss (CEO) is an
indicator of the tone at the top and how a personal issue of a member of top management might influence
proper accounting and reporting.
This case can be used to discuss with students whether someone playing dirty (threats) release an
accountant from the duty to follow rules (i.e., threaten back, break confidence, or even blackmail)? Another
way to look at this is it all right to use unethical means to solve an ethical dilemma?
This is a good case to use role-playing. Let one student play Helen; another plays Carl Land; a third can
play the CEO with the gambling problem. A discussion might begin with Helen and Land, perhaps add
another key member of management such as the chief operating officer, or just invite a member involved in
the decision-making to join the discussion. Helen and Land may decide to speak directly with the CEO.
Based on what happens, the matter might be taken to the audit committee. An interesting aspect of the role-
play might be how the students handle the gambling problem of the CEO. What if he had a drug problem?
What if he had an Anthony Weiner-type problem and engaged in inappropriate sexting?
Due to Helen receiving reimbursements for autistic son, Helen needs to develop a short term and long term
strategy to the situation. In the short run Helen can resist Land, look for a job quickly, and quit. Helen could
also give into the threat from Land and look for a job less quickly. In the long run Helen may consider
taking the situation to the audit committee and the Board of Directors. She may threaten the CEO with
exposure of his gambling problem. Helen may consider in some way blow the whistle on the situation. If
Helen gives into the threats, there will more pressures and threats of exposure; next year may bring more of
the same when improper revenue recognition or another accounting treatment is needed.
Questions
1. Briefly discuss the rules for revenue recognition in accounting and how they pertain to this case.
Does the proposed handling of the $12 million violate those rules? Be specific.
Revenue recognition requires that the revenue be earned and realized or realizable. These concepts are
meant to ensure that (1) the company does not recognize revenue unless and until it has performed under
the terms of the arrangement, thereby giving it the right to receive and retain payment as documented in the
arrangement, and (2) the company will indeed receive and retain payment in a form that has value to it. The
2. Assume Carl Land is a CPA and Helen Strom holds the Certificate in Management Accounting
(CMA). What ethical issues exist for them in this situation? Identify the stakeholders in this case
and Strom’s ethical obligations to them.
CPAs should change accounting treatments only when it is to follow GAAP or provide fair disclosures, not
because of threats or bribes. As a person of integrity Land should not subordinate his judgment the CEO
based on pressure imposed and the fallout from his gambling problem. The only reason to change
CMAs are obligated by the competence standard to follow GAAP in reporting financial information. Helen
should ensure the credibility of the financial information. If Land will not change his mind then Helen
The stakeholders in this case are the shareholders, creditors, employees, regulators and customers of Family
Games, Inc. All the stakeholders but, particularly, the shareholders, creditors, regulators and employees,
expect that the officers of the company will follow applicable laws, rules and regulations. They expect that
From a right perspective, the stakeholders have a right to financial statements in accordance with GAAP
and with adequate disclosure. Helen has a right to work in a job without threats to her family security. From
a deontology perspective, Helen and Land have a duty to meet their professional obligation of not
3. To what extent should Helen consider the gambling problems of her boss in deciding on a course of
action? To what extent should Helen consider her child care situation and the threatened cutoff of
reimbursements? If you were Helen Strom, what would you do? Why?
The gambling problem of the boss is an on-going problem or pressure, which might offer a counter
Helen’s childcare and threatened cut-off of reimbursements should not be considered in her determination
of course of action. A person of character acts the same under all situations or circumstances. However, her
Helen should start with Carl Land and use Kohlberg reasoning to discuss why he doesn’t want to commit
fraud. The Kohlberg reasoning would follow along these lines: stage 1, you will be caught and blamed;
stage 2, it isn’t worth it for you; stage3, it is not acceptable according to accounting principles; stage 4, it is
illegal and harms society; stage 5, enabling the gambling habit hurts the boss; the treatment hurts the owner,