Chapter 4 This Where The Buck Stops Terms Long range

CASE 4.2

F&C INTERNATIONAL, INC.

Synopsis

Over two centuries, the Fries family of northern Kentucky and southern Ohio built a dynasty of

sorts in the flavor industry. Alex Fries, a German immigrant with a background in chemistry, settled

in Cincinnati during the early nineteenth century and a few years later established a flavor company.

Throughout the nineteenth and twentieth centuries, Fries and his descendants owned, operated, or

oversaw several flavor companies, the last of which was F&C International. In the early 1990s, F &

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F&C International, Inc.—Key Facts

190 Case 4.2 F&C International, Inc.

1. The Fries family of Cincinnati had a long and proud history in the flavor industry that Alex Fries

founded during the nineteenth century.

2. At least ten F&C executives or high-level employees participated in a fraudulent scheme to

4. Company officials went to great lengths to conceal the fraud, including establishing a fictitious

5. The controller of F&C’s Flavor Division ignored and avoided subordinates’ efforts to make her

aware of evidence indicating the existence of an ongoing fraudulent scheme within the company.

7. F&C’s CFO resigned from the company after realizing that the company’s financial records were

unreliable.

9. The SEC permanently banned Jon Fries from serving as an officer or a director of a public

10. F&C filed for bankruptcy in 1993 and was liquidated the following year.

Instructional Objectives

Case 4.2 F&C International, Inc. 191

1. To confirm the critical role of corporate accountants in the financial reporting domain and the

SEC’s recognition of the importance of that role.

Suggestions for Use

Here is another case that lends itself well to a role-playing exercise. When faced with an ethical

dilemma, individuals often fail to reach out to close friends and associates to help them resolve the

crisis. Individuals involved in an ethical dilemma often do not have sufficient “distance” from the

situation to identify and understand the key factors or dimensions underlying the problem or to grasp

its unfolding dynamics. Reaching out to a friend or trusted associate can be extremely beneficial

since that individual may be able to provide a more complete and objective point of view regarding

the given situation. In this case, I ask two students to assume the roles of Catherine Sprauer and

Suggested Solutions to Case Questions

1. Chief executive officer: In most companies, the CEO ranks as the ultimate decision maker within

192 Case 4.2 F&C International, Inc.

the firm. This is where the “buck stops” in terms of long-range policy issues facing a company.

Granted, in most companies, the CEO seeks and obtains input from fellow officers,

the board of directors, and various other parties before making decisions on important matters facing

a company. Independent auditors may occasionally question a client’s CEO regarding key

Chief financial officer: The CFO in most companies has responsibility for both the financial

management and accounting/financial reporting functions of the organization. As the chief financial

manager, the CFO oversees the raising of capital and the delegation of that capital to various uses

within the company. The CFO also ensures that his or her company has adequate accounting and

financial reporting systems to collect the information needed for internal decision making purposes,

generally the division manager or president. Division controllers are much closer than high-ranking

corporate executives to the “nuts and bolts” accounting and control issues that are of major interest

to auditors. As a result, auditors rely heavily on these individuals and their supporting staffs to help

them document a client’s internal control systems, to obtain documents needed to complete

substantive tests, and to obtain at least initial insights or opinions on important accounting or

financial reporting issues facing the company.

2. As pointed out in the Suggestions for Use section, my students complete this item as a group

assignment. Students meet in groups to arrive at a consensus ethics score for each of the individuals

listed. Then, I post these consensus scores on the board and initiate a discussion/debate among the

Case 4.2 F&C International, Inc. 193

4. The SEC ruled that while employed by F&C, Schuster failed to disclose in F&C’s financial

reports the company’s “significant accounting problems” and failed to ensure that the company

issued ”accurate” financial statements to the investing public. Following his resignation, Schuster

remained associated with prior financial statements issued by F&C that were being relied upon by

5. Here again, the issue is not what Fletcher Anderson “should” have done but what the given

student “would” have done given the circumstances. Anderson certainly had a responsibility to

investigate and resolve the matter by either confirming F&C’s inventory problem or discrediting that