Marko Veckov

Student’s Name Professor’s Name Course Number Date CASE STUDY Introduction Michael Spark is ahead of the North Central sales District at a publicly held company. In the case study “From Sparks to Fired” he presents several ethical issues in the conduct of his personnel that may jeopardize their and his current position. The paper gives insight into these breaches of ethical code of the company and suggest the ways in which the internal controls can be correct for avoidance of such situations in the past. In one of those cases salesman from his division made significant contribution to the ‘XYZ Charities’ on the request of his client. However, ‘XYZ Charities’ wasn’t a charitable organization, but a gentlemen’s club instead. Secondly, one of the other salesmen wanted to take his client, who makes approximately 80 % of his revenue, and his family on a ski trip. After client’s last-minute cancelation, he decided to take his neighbor’s family instead, claiming that the reservation for the ski trip was nonrefundable. Other, employee often bought seasonal NFL tickets, but instead of taking his client to the games, he took members of his family more frequently and run all through the company. Then, there was a case of employee who took his client frequently to dinner, but the bills for these dinners were excessive. Employee said that many times, client insisted to bring few unopened wine bottles with him and again this was all done through the company. There was also the case of an employee who faked dinner bills for several evenings, without either him or the clients attending them. Internal auditing investigation found out that on some occasions sales- person treated his staff members and not the clients. Company for which Mr. Sparks works had a code of conduct, but many employees failed to familiarize with it, believing it is mostly dedicated to top management. When auditors find out about these irregularities, both Mr. Sparks and his sales staff were facing uncertain future or even the possibility of being fired. Mr. Sparks is a long-time employee and his position is therefore even more worsened by these events. Summary of the area of Accounting In order to give recommendations to the situation presented above, it is necessary, at first to get familiar with different management approaches to problem like this. Today’s modern organization are complex, and it is sometimes possible to adopt one or two approaches to the specific problem. Management accounting theories are either organization-specific or more accounting specific. The implementation of these approaches depends upon specific factors, called contingencies. These typically include the environment, technology, size and structure of an organization, but recently strategy and national culture have been added [CITATION AlH13 \p 14 \l 1033 ]. Besides this continency method, institutional theory of accounting is also relevant to this case, as it is more organizational focused with an emphasis on management accounting practices changes. One other interesting approach is so-called structuration theory, which explains employees conduct through set of rules and regulations, to which they must rely on. Therefore, organization and its rules can point out to amore institutional approach when it comes to management accounting field. However, this is mostly done through the prism of society and its members and rules. Sales personnel in the case of the company for which Mr. Sparks works performed several misconducts. These were breaches of the ethical code of conduct and the following chapter will provide insight into how this can be corrected. Discussion COSO framework is a guide used by private organizations on areas like enterprise risk management, internal control and fraud deterrence. In today’s highly globalized corporate world, organizations are facing increased risks and this set of guidance enables them to navigate through uncertainties and provides guidance on non-financial reporting. There are three dimensions of the original COSO ERM framework, and these are categories, objectives and components of this framework. Categories, of ERM planning are, strategic, operations, reporting, and compliance. Objectives consist of eight parts and these are, internal environment, objective setting, event identification, risk assessment, risk response, control activities, information and communication, and monitoring. Finally, components are subsidiary, business unit, division and entity level. Internal environment or control environment relates to set of standards and procedures for performing internal control on the level of the entire organization. The board of directors and senior management establish the tone at the top regarding the importance of internal control including expected standards of conduct (Committee of Sponsoring Organizations of the Treadway Commission, 2013). Management expects the implementation of these standards of internal control at different levels of the organization. It is important for any organization to set its objectives for managers to access their fulfillment later. This framework enables setting up of these goals which align with the company’s mission and are in accordance with company’s risk appetite. Third objective of the framework relates to identification of external events that may pose a threat, risk or opportunity for the organization. Risk assessment refers to risk identification, for gaining insight into how to manage them. The assessment consists of both evaluations of risk happening probability and its impact. Risk response relates to avoiding risk, sharing it, reducing and accepting it. Control activities relate to procedures established for providing the framework through which management’s responses to risk will be evaluated. Information is communicated in a way, which enables people to fulfill their responsibilities. Information is a necessity at all levels of the organization for accessing the risk. The entire implementation of above-mentioned principles is monitored for enabling timely reactions if they are needed. The following table gives insight into control weaknesses of the company for which Mr. Sparks works and gives recommendation on how internal controls can be strengthened. COSO ERM Component Internal Control Weakness Recommendation Internal environment Lack of proper communication of the standard ethics code to all company’s levels Code of ethics existed in the company prior to these events, but only related to top executives. Therefore, it needs to be communicated to the other company levels, as well Objective setting Being able to reach out set goals without violating company’s code of conduct. Also, lack of immediate detection of these violations Setting up of system protocol for checking the budget money spending Event identification Lack of identification mechanisms of the events that may pose a risk or a treat to the organization’s operations. Among these events key ones in this case would be tied to personnel and their misconduct, which might jeopardize material aspect of daily company’s operations. It is necessary to communicate to all organization’s levels the design and expectations of daily operations and how they should be performed. This execution function should be followed with proper monitoring, where lower level managers will follow the execution of daily operations of salesmen who meet with clients, in accordance to the strategic plan. Risk response Absence of possible alternatives for lowering the risk of sales employees to an acceptable level In order to reduce the risk of employee’s misconduct, while having meetings with clients, a reporting obligation can be implemented. It would consist of self-reporting and justification of costs, with clear mention on how provided sources were used Information and communication Lack of standardized reporting and internal practices, between managers and sales employees regarding above suggested recommendations, mostly concerning reporting and justification of spend budget money Establishment of internal protocols in the form of self-reporting standards and cost justification practices. It should be installed as obligatory for sales employees to report and justify every dollar spent on their business trips, meetings and lunches. The following table shows, which principles where violated by the sales personnel and the examples of these violations: Principle violated Example Competence – Non-performing duties in accordance with relevant laws, regulations and technical standards Ethical code of conduct existed just its application wasn’t obligatory for lower employees. However, in doing their business activities, sales personnel violated ethical code as a representative of the company Confidentiality – avoidance of usage of confidential information in an unethical way or to perform illegal activities By failing the trust appointed to them with reference to budget money spending, sales personnel used entrusted resources in an unethical way. In some cases, they even reported money being spend, although no events for which that money was supposed to be used ever happened. Integrity - avoidance of regular communication to associates and managers in order to avoid conflict of interest. Avoidance of any conduct that would put the profession, company’s or employees’ reputation at risk. Non-contributing to the company’s ethical culture and profession’s integrity above all. By conducting in an unethical way at meetings with the clients, where in some cases money was being spent on fictional events, employees at first put their position in the company at risk. Further, by over- spending budget money intended for meetings with the clients, they put their department’s reputation within the company at risk. Sales employees misconduct not only failed to comply with ethical standards of the company, but rather presented these standards as just a formality, often inconsistent with business doing reality. Communication – avoidance of provision of all the relevant business information fairly, timely and objectively. By failing to provide all the relevant information, sales personnel negatively influenced managers’ decision making It wasn’t until internal auditing activity was performed at crucial department, that these violations were noticed. By failing to provide accurate reporting on money being spend, sales personnel who met with clients differed manager’s decisions based on this relevant information. The importance of existence of strong internal control mechanism is multiple. Strong internal control within working environment of any organization, enables the fulfillment of three set of goals, operations, reporting and compliance. It enables the performance of daily, operational and strategic actions in an effective and efficient way and in accordance with business code of ethics. By doing so, it provides space for achieving company’s operational and financial goals and for keeping assets from losing their value. Strong internal control includes financial and non-financial reporting, that in order to be accurate and timely must be done with reference to the ethical code of conduct. Finally, compliance goals, who refer to business conduct in accordance with regulations and laws cannot be performed without strong internal control mechanism. In the case study From Sparks to Fired1, the absence of strict internal controls led to breaches of ethic code of conduct. This not only put into question the reputation of sales personnel who performed unethically but influenced in a negative way the process of decision making. It was only after the internal auditing was performed on this department, that these occurrences were identified. Suggested changes to the internal environment in the form of communication of code of conduct to all levels of the company, would certainly help in achieving three proclaimed goals of any organization. Doing business in an ethical way not only helps in maintaining organization’s reputation, but helps in achieving operational, strategic and financial goals, as gains from unethical conduct are short-termed. We can see this on the example of these sales employees who acquired gains in the short-term, but who in doing so jeopardized their long-term position within the company. Now they are all facing being fired, along with their supervisor, as a result of misconduct and absence of strong internal controls and ethics relationship. Conclusion Based on the initial presentation of the case, it is possible to conclude that breaches of the company’s code of conduct did happen and that they endanger the position of Mr. Sparks and his staff. It is necessary to acknowledge that strong internal controls lead to business doing with accordance with regulations and rules of the company. Without strict implementation of company’s ethical code of conduct, employees and organization will find a way to differ this guidance and along the way create damage to themselves and the others. The purpose of the ethical code of conduct is for employees to adopt it, making sure that the company values are included in their everyday practice. These company values must reflect its strategic ideas and be presented with reference to company’s integrity. The appropriation of these rules is one step towards next activity and that is risk assessment, which will be done in an easier way once first move is made. Afterward, it is important to set up a proper communication mechanism, like in the form of suggested justification of costs and self-reporting presented in this case. Finally, it is important for these recommendations to be communicated to all company’s levels, just like this ethical code of conduct. Works Cited Al-Htaybat, Khaldoon Abed. "Management Accounting Theory Revisited: Seeking to Increase Research Relevance." International Journal of Business and Management (2013). Accessed 3 Decemeber 2020. .