Case specifics:
Rich has worked as the textbook manager at a public university since 1999. When the previous bookstore manager left in 2002, Rich applied for his job. University administrators liked Rich because he often worked late, as did the administrators. Rich also rarely missed work for either illness or vacation. Thus, the human resources (HR) department did not follow standard hiring procedures such as checking references. Instead, the HR department approved Rich as the new Bookstore Manager within days of the previous manager’s departure. Excitedly, Rich accepted the promotion and even agreed to continue working as the textbook manager despite the fact he would not be paid for these extra responsibilities. The Dean of Students, who monitors bookstore operations, felt this would be a good opportunity for both Rich and the university.

Rich has managed the bookstore for the past three years without any issues, which has been a relief since you have lost two internal auditors on your team. In addition, the arrival of your baby 6 weeks early caused you to fall way behind on regularly scheduled internal audits.
The university is in the process of applying for a loan to fund an expansion. Several lenders expressed interest in funding the project and requested audited financial statements. Fortunately, they have agreed to accept internally audited financial statements in exchange for a 1.25% higher rate of interest.
As a member of the internal auditing team of this public university, you are responsible for providing the internally audited financial statements. To get started, you requested a reconciliation of the bank deposits and checks logged in by Pam Becker, the accounts receivable clerk. You may find the Policies and Procedures Manual for Accounting & Financial Control and Internal Controls for Small Organizations useful.

After reviewing the reconciliation for the past quarter, you are in a quandary. Several retail items from a major supplier are on clearance and the paper trail leads to a check from the supplier that does not appear on any bank statements. You recall the previous bookstore manager telling you that in situations where merchandise is put on clearance, the supplier will often write a check to help offset bookstore losses.

You decided to call Rich Martin, the bookstore manager. Rich was your stepson before you divorced his mother twenty-five years ago, but you see no reason to inform the university of this past relationship. Rich is on his vacation in St. Thomas, U.S. Virgin Islands, but you are able to contact him via cell phone. Rich confirms the supplier did send a check, but because he was in a rush to start his vacation, he failed to deposit the check. However, he does remember locking it in his desk for safekeeping. Rich said not to worry; he would deposit the check as soon as he returned from vacation.

There was some nervousness and hesitancy in Rich’s voice that made you uncomfortable with his explanation. In addition, you know that protection of assets is a critical responsibility of internal auditors. You may find the Internal Auditing Handbook and the Risk Based Internal Auditing resources helpful in completing your investigation. Rich’s hesitancy reinforces your decision to retrieve and deposit the check. You call the security desk and request that Rich’s desk be unlocked with the master key. You perform an exhaustive search, but do not find the check. You did, however, find an envelope in the very back of the bottom drawer; it contained $80,000 in cash!

After a thorough investigation, the internal audit team determined that most of the money stolen by Rich is from textbook buy-back programs. It is common practice for textbook resellers to arrive on campus twice a year (at the end of each fall and spring semester) to pay wholesale prices to buy back textbooks faculty members and bookstores no longer need. In his position as the textbook manager, Rich took full advantage of this opportunity. What remains a mystery is how Rich could have collected $80,000 from what typically gives rise to a very small amount of money.

The University had outsourced the operations of the textbook buy-back program to Booker’s, Inc., a small firm out of Baltimore. Rich was in charge of handling all interactions with Booker’s, Inc. At the end of each buyback period, Booker’s, Inc. wrote a commission check to the university for allowing them to conduct the program on campus. Peter Justen, one of Booker’s representatives who was also on Rich’s bowling league, hand delivered the checks directly to Rich.

Fortunately, Rich’s favorite daughter-in-law Rebecca Knownott, CPA worked in the business office of the university. The mother of a young child, Rebecca chose to work as a bookkeeper even though she was a CPA because she did not want to work beyond 40 hours per week, which is typically required of CPAs. Rebecca never questioned Rich when he asked her to cash the checks, claiming he needed the cash to pay refunds to students for sales returns. Although Rebecca wondered why the bookstore would have so many refunds, she never questioned her father-in-law because it would displease her husband and Rich was paying the childcare expenses for her daughter Tabitha.

In addition, the bookstore sold textbooks to Booker’s, Inc. when professors no longer needed them. Peter also hand delivered these checks to Rich. Rebecca cashed the checks for her father-in-law, again without questioning him. For the last two years, during which Rich served as both the bookstore and textbook manager, Peter had been paying the university in cash instead of checks. The total of the missing funds from the buy-back process amounted to $372,586.46, and the total missing funds for the sale of wholesale texts was $629,482.32.

The checks payable to the university for the Athletic Department’s textbooks were also given directly to Rich. He never accounted for the checks nor did he transfer the funds to the Athletic Department. The total of missing funds to the Athletic Department was $340.520.67.
After Rich received and cashed the checks from Booker’s, Inc., he failed to record the transactions in the university’s accounting system; keeping the cash for his own personal use.

I. Steps to Completion
1. Thoroughly examine the AICPA’s Code of Professional Conduct.
2. Identify all stakeholders in the case and explain what each stakeholder has at stake. A stakeholder could be an owner, employee, shareholder, taxing authority, community, investor, etc.
3. List and describe all ethical conflicts in involved in this scenario
4. Write a 20-25 page paper that responds to the following ethical considerations.

a. Part 0 of the AICPA Code of Professional Conduct refers to professional conduct of all CPAs. Focus on the following topics and describe how they relate to the specifics on the case.
i. 0.300.020: Responsibilities
ii. 0.300.030: The Public Interest
iii. 0.300.040: Integrity
iv. 0.300.050: Objectivity and Independence, and
v. 0.300.060: Due Care

b. Part II of the AICPA Code of Professional Conduct: Members in Business refers to threats that fall into one or more of the following broad categories. Discuss the threats relevant to the specifics on the case.
i. Adverse interest threat
ii. Advocacy threat
iii. Familiarity threat
iv. Self-interest threat
v. Self-review threat, and
vi. Undue influence threat

The AICPA Code of Professional Conduct discusses safeguards and defines safeguards as “Safeguards may partially or completely eliminate a threat or diminish the potential influence of a threat” (AICPA Code of Professional Conduct, p. 134). Suggest safeguards that could have mitigated the risk of threats in the case.

Case specifics: Rich has worked as the textbook manager at a publ...