All of the vice presidents of Brazos Manufacturing, Inc. (BMI) had been urged to cut their budgets. The executive vice president (EVP) couldn't wait to charge out another bottle of wine or treat his family to another fancy dinner on the company's tab...and the ethics officer didn't seem to mind. What's the best course of action for the controller who uncovers the EVP's actions?
"Will you change my W-2 form to show that I've used my car for personal use?" Troy , the EVP of BMI, asked Jack, the company controller. Although Jack handled many personal requests for the EVP, this request didn't sound quite right. It had been a busy day at BMI, an international automotive parts supply company, and Jack's thoughts were burdened with his responsibilities. As controller of a $550 million company, Jack had to juggle many tasks using his knowledge of ethics and his natural inquisitiveness. He took his job seriously and knew that his signature on company documents meant that he was not only aware of the company procedure but approved of it.
One thought troubled Jack. Troy Sozuko didn't turn in any business miles. All of the miles he drove in his company-provided vehicle were considered personal for accounting's sake, Jack mused. The W-2 form reflected 100% of his personal use, so there was nothing to change. Jack considered the EVP's tenure and authority at BMI Sozuko had been with BMI for the past 30 years and was the highest-ranking officer in North America. Perhaps Jack could take a look at his expense reports and ascertain an acceptable legal number of business miles based on gas receipts turned in. Upon initial review of 2001 expense reports, Jack discovered a startling truth: flagrant discrepancies. Not only had Troy expensed original gas receipts, but there were duplicate, triplicate and, in some instances, quadruple copies of gas receipts occurring on the same day, at the same gas station, at the same pump number with purchases taking place just moments apart from one another.
How could this be? Jack thought. For goodness sake, Troy only had one car! Even if Troy was gassing up his and his wife's car, BMI's policy strictly prohibited expensing gas for any vehicle other than a company car. This caused Jack to look further. When he did, what he found was shocking. Jack had to entrust this information to the ethics officer of BMI.
"Don't worry, it can't be that much," smirked the ethics officer, Matt Thompson. Jack had only begun to report his findings, beginning with Troy 's reimbursement for fraudulent gas expenses, and Matt's response had shocked him. Jack realized that Matt considered the gas expense discrepancies to be small in the grand scheme of business at BMI. However, it bothered Jack to think that standards were strictly enforced just a couple of months ago when an employee had been terminated for misuse of company funds. Were the executives at BMI above the law? More troublesome, now that Jack was privy to the apparent favoritism shown to executive officers, how could he, as controller, condone or approve of such practices? He didn't approve at all, and in fact, he was infuriated.
"But Matt, there's more," Jack sputtered. The questionable gas receipts had led Jack to search expense reports for the past three years, where he had found personal dinners charged to BMI, personal items claimed as business gifts and false reporting of travel and entertainment receipts for dinners and lunches that never took place. (Further examination also uncovered up to three weeks' vacation a year that was never reported to human resources and payroll, thereby allowing Troy time off with pay, as well as requests to be paid for his accrued but "unused" vacation at the end of each year.). Matt Thompson stared blankly at Jack as the facts were presented.
"Well," Matt said, shrugging. Jack realized that this was a touchy situation that needed to be handled carefully. He wondered whether a veteran like Troy Sozuko would be held accountable or even reprimanded for his actions. What made Jack boil, however, was the lack of concern and downright flippant manner in which this information was being received by the ethics officer of a company of BMI's stature. Jack couldn't believe Matt could react this way. It started to make sense, though, when he remembered that Matt Thompson reported to Troy Sozuko.
"Whatever you do," remarked Matt, "just don't report this to the president."
Jack had to think quickly. Do I dare tell him? Jack thought to himself. Only a month ago, Troy had asked Jack to create a new company organizational chart that eliminated Matt's position. When Jack told Matt, he was shocked. Suddenly ethics were very important to him.
"Jack," he said, "go through Troy 's expense reports for the past three years. I want to see it all! We're going to have to do something about this." Jack felt sick at this newly found enthusiasm for justice.
"Let's see. Monday, January 13, lunch at Osaki's, a credit card receipt. January 20, lunch at Osaki's, a blue cash receipt. February 10, which happened to be a Saturday, lunch at Osaki's, a pink cash receipt," Jack recalled out loud. Many years of auditing experience had taught him to notice little red flags such as these. Jack went to lunch at Osaki's and simply asked the manager what type of cash receipts they used.
"We only use brown receipts and have only used brown receipts for the last five years," the manager told Jack. Jack presented the blue and pink receipts and the manager emphatically told Jack that these were not his restaurant receipts. It appeared that Troy handwrote false receipts to receive reimbursement. Jack continued to dig deeper, thinking it very fortunate that he had a copy of the EVP's personal calendar. Troy had given Jack a copy a few months earlier so that Jack could schedule meetings. Having this tool made it easy for him to compare the personal calendar with the calendar Troy gave his own secretary. In fact, it showed Jack that Troy was indeed keeping two separate calendars. How was it possible, for example, that Troy could be entertaining clients at Los Angeles' finest Italian restaurant—as his business calendar claimed—as well as attending his daughter's birthday party hosted at the same restaurant—as his personal calendar said? Did he run back and forth between tables like the character in "Mrs. Doubtfire"?
Jack also uncovered dinner receipts expensed to the company that betrayed interesting information, such as four bottles of wine (to entertain clients) totaling $395 were purchased to go. There was no other receipt showing that dinner was purchased that evening. Did Troy entertain these guests at his home? Jack wondered. It was possible; however, more than twenty other receipts had proved client entertainment usually took place at the restaurant.
Then there were the business expenses on Saturdays and Sundays. Jack knew the EVP never did business on the weekends because he always spent time with his children. Questions about whether Troy 's actions were deliberate or accidental and coincidental were answered after three months of digging into stacks of expense reports. Jack felt that he had enough evidence to prove fraud.
But it wasn't that simple. In a perfect world, unethical behavior would be dealt with, ethics officers would enforce standards and employees who didn't follow those standards face the consequences. However, due to Troy 's tenure with the company there was a possibility that this whole incident might be swept under the rug.
"After all," Matt said, " Troy has done an excellent job during his thirty year career at BMI."
Jack was furious. He still had a W-2 deadline to meet and was determined not to change the W-2 amount. If he did, he would be acting outside of his professional standards and allowing one person, although it was the EVP, a benefit not legally available to all other employees. He would have to deal with Troy and he wouldn't be easy to deter.
But Jack had an idea. Knowing that fraud had to be reported to the appropriate level of management if discovered by the independent auditors, Jack called the partner at the company's auditing firm and disclosed his findings. Now the truth had to come out and Jack had covered his bases. The CPA firm partner advised Jack to strongly encourage that this information be reported to the company president. Jack met with the ethics officer again and played his trump card. "Matt, if we do not disclose this to the company president, I'll be forced to seek legal advice for my own protection, and I will openly reject any proposal to submit to the EVP's authority based on the fact that he is a thief."
Matt reconsidered. Jack refused to fight this battle alone and Matt was beginning to understand the significance of what Jack had discovered. What would Jack think of him if he let this incident slide? Moreover, how would he look if the president was to find out and he had done nothing?
Matt called a meeting with BMI's North American Ethics Committee. Although life would have been easier if he could sweep this under the corporate rug, he was forced to act. Maybe he could avoid personal involvement by telling Jack that the committee had agreed to research the matter. However, the North American Ethics Officer told Matt this was a local decision and should be handled locally. They weren't going to get involved.
It took two weeks before Matt decided to tell the local president. Matt feared that the president would overreact and merely reprimand Troy , causing tension-or worse—between Matt and his boss. Matt would have been happiest if Jack had simply changed the W-2 form, but he had underestimated Jack's commitment to ethics.
Matt wanted an independent opinion of Jack's findings before presenting the information to the company president. Matt and Jack decided to hire a forensic CPA to confirm the findings. The forensic CPA concurred with all of Jack's findings and judgments. Now Matt had no choice but to disclose the matter to the president. Upon learning of these fraudulent acts, the president requested the involvement of the North American Ethics Committee and asked the company human resource attorney to be involved in this meeting, as well.
"Why couldn't the president just make this decision?" Jack wondered. The answer was that if Troy were to be terminated, the president didn't want to face a wrongful termination suit. If, after being presented with the facts, Troy completely denied the allegations, the president needed legal protection to establish that BMI had acted appropriately. Would Troy , a thirty-year veteran of the company, admit to stealing?
Troy did admit to everything that he was confronted with by the Ethics Committee. In fact, his admission came so quickly that Jack had to wonder if there was more fraudulent activity to be discovered. Troy had apologized, sincerely, and asked to keep his job.