Ethical Obligations and Decision Making in Accounting, 4/e 1
Case 5-1 Loyalty and Fraud Reporting (a GVV case)
Ethan Lester was seen as a “model employee” who deserved a promotion to CFO, according to
Kelly Fostermann, the CEO of Fostermann Corporation, a Maryland-based, largely privately
held company that is a prominent global designer and marketer of stereophonic systems. Kelly
considered Lester to be an honest employee based on performance reviews and his unwillingness
to accept the promotion, stating that he wasn’t ready yet for the position. Little did she know that
Lester was committing a $50,000 fraud during 2015 by embezzling cash from the company. In
fact, no one seemed to catch on because Lester was able to override internal controls. However,
the auditors were coming in and to solidify the deception, he needed the help of Vick Jensen, a
close friend who was the accounting manager. Lester could “order” Jensen to cover up the fraud
but hoped he would do so out of friendship and loyalty. Besides, Lester knew Jensen had
committed his own fraud two years ago and covered it up by creating false journal entries for
undocumented sales, returns, transactions, and operating expenses.
“Vick, I need your help. I blew it. You know Mary and I split up 10 months ago.”
“Yes,” Vick said.
“Well, I got involved with another woman who has extravagant tastes. I’m embarrassed to say
she took advantage of my weakness and I wound up taking $50,000 from company funds.”
“Ethan, what were you thinking?”
“Don’t get all moral with me. Don’t you recall your own circumstances?”
Questions
1. Analyze the facts of the case using the Fraud Triangle. Include a discussion of the
weaknesses in internal controls.
Pressure/Incentive
Vic is being pressured by Ethan to commit a $50,000 fraud. Vic is somewhat beholden to Ethan
because Vic had committed his own fraud two years ago and covered it up while repaying the
amount at a later date. Ethan said nothing about it so Vic probably thinks he owes Ethan to
Opportunity
The internal controls are either nonexistent or do not work probably because Ethan overrides
them. There appears to be no effective oversight of Ethan and Kelly Fostermann, the CEO,
blindly trusts Ethan. No one seems to be watching over Ethan. It makes you wonder about the
internal auditors and what role is played by the audit committee, assuming the company has one.
Rationalization
While not explicitly stated, Vic can assume this is a one-time request by Ethan. Vic can
rationalize his actions a necessary evil to prevent anyone (other than Ethan) knowing about the
fraud he committed two years ago. He may feel a loyalty obligation to Ethan as well.
2. Which rules of professional conduct should Vick consider in deciding on a course of
action? Explain. What are Vick’s ethical obligations in this matter?
1.130.020 of the Code. The case doesn’t provide the position of Ethan within the entity but it’s
clear he is a superior to Vic and may be the controller.
3. Use the “Giving Voice to Values” framework to help Vick decide on his next course
of action. Why do you recommend it?
Ethical Obligations and Decision Making in Accounting, 4/e 3
Vic needs to counter the reasons and rationalizations provided by Ethan to make a convincing
case why he cannot do what Ethan requests. Using the GVV framework, he needs to consider the
following.
Expected or Standard Practice: “Everyone does this, so it’s really standard practice. It’s even
expected.”
Materiality: “The impact of this action is not material. It doesn’t really hurt anyone.”
We don’t know enough about the materiality issue, although fraud should always be considered
material. We don’t know whether the company is publicly-owned either but someone will be
hurt if the fraud goes forward unabated. This may include creditors as well as Kelly and the
company.
Locus of Responsibility: “This is not my responsibility; I’m just following orders here.”
Locus of Loyalty: “I know this isn’t quite fair to the stakeholders, but I don’t want to hurt my
reports/team/boss/company.”
This is likely to be the strongest argument made by Ethan. He believes Vic has a loyalty
obligation to him because Ethan has remained silent for two years about Vic’s fraud. Vic needs
to focus on pillars of character other than loyalty, which is a secondary value to honesty and
integrity. Vic needs to find a way to explain this to Ethan, who probably knows it but is biased
by his own unethical actions.
Isolated Incident: “This is a one–time request; you won’t be asked to do it again.”
While not explicitly stated we can assume Ethan would include this rationalization in any follow
up dialogue with Vic.
In crafting a response to Ethan, Vic needs to consider that Ethan is a CPA as well and Vic should
remind him of his ethical responsibilities. Vic should be careful not to discuss the matter with