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INTRODUCTION

The city of Dixie recently made headlines because of budget

cuts and problems with the pension fund for city employees.

The city has never had financial difficulties before. Most of

the residents in the community have an income well above

the national average. Their large houses have always provided

significant cash flows to the city through property taxes,

and their local shopping provides extra revenue through an

additional sales tax. Because of this stability, the city had, until

recently, boasted an impressive fire department, an extensive

police force, and many other services, attracting talented

individuals away from nearby communities with their high

salaries and very competitive pensions.

While revenues do not appear to be dropping, the city’s

cash flows have been negative for the past three years,

cutting deeply into the mayor’s emergency fund and into

local coffers. The problems have become so severe that the

fire department and emergency medical technician (EMT)

services have held fundraisers and solicited donations to stay

operational and meet their salary commitments. Other public

services, such as road repair and park maintenance, have also

started to suffer.

A few prominent businesses and members of the

community have already moved away because of these

problems, and rumors that many others are beginning to

consider moving have flooded the mayor’s office. The loss of a

large number of affluent citizens or successful businesses would

be disastrous for the struggling community, making city leaders

desperate to find a solution to their current cash crunch.

In a meeting of all the senior public officials and financial

officers of the town, the mayor and city council offered a

plea to cut costs wherever possible, to downsize if necessary

and to look for any clues as to where the city funds are

disappearing. The frank discussion of the city’s position

unsettled many of the leaders, especially Cathy Clark. Cathy

is an accounting specialist, the community’s only remaining

accounting specialist due to the recent cuts. Cathy and

Kimberly Hedges, the city’s comptroller and treasurer, make

up the entire finance department for the city.

As the mayor talked, Cathy started to worry. Could the

trouble be in the comptroller’s office? She hoped not but was

starting to wonder. While the mayor continued to talk, Cathy

recalled a couple of specific incidents in the past few weeks

that worried her. The first was a discussion of a strange

account Cathy had found almost two months ago. The

second was a conversation about workload that happened

just two weeks ago.

TWO MONTHS BEFORE THE MEETING: THE DCDA ACCOUNT

“Kim, can I talk to you for a minute?” Cathy called out to

her boss through Kimberly’s open door. Cathy had a hard

time with such informal behavior when she came to Dixie

from a large corporation in Seattle, but Kimberly encouraged

a relaxed atmosphere. She felt that it was important for the

Comptroller’s office to mirror the atmosphere in the small

town. And she hated being interrupted in her office. Cathy

had always thought it was weird that Kimberly would rather

come to her than have Cathy go into her office, but the pay

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ISSN 1940-204X

Tough Choices: Ethical Decisions in Whistleblowing

Marla A. Kraut, Ph.D. University of Idaho

Jason C. Porter, Ph.D. University of South Dakota

Amber Gray University of Idaho

© 2 0 1 6 I M A

was good enough and the job comfortable enough that she

certainly wasn’t going to complain about something so simple.

“What do you need, Cathy?”

Kimberly’s question brought Cathy’s mind out of the

clouds. “I just had a question about this new account,” she

said quickly.

“New account?” Kimberly asked, frowning. “What new

account?”

“This one,” Cathy pointed to the new line on her

spreadsheet: DCDA Dixie Capital Development Account. “I

haven’t seen this one before.”

“Oh, it’s been around for a while,” Kimberly said, looking

back at her office. “Maybe you haven’t seen it because

nothing’s gone through there for a while.”

“Maybe,” Cathy agreed with a frown. “But it’s still

weird. I mean, it looks like you are the only signatory on

the account. Don’t all of the accounts need at least two

signatures?”

Kimberly smiled. “Oh, so that’s the trouble. Your internal

auditing buzzers are going off. That’s a pet account of the

mayor. He uses it to take care of potential investors that

come in and for hosting parties for the staff and the other

small costs. Since the amounts are so small, he and I just

take care of it.”

“There are several very large transactions,” Cathy noted,

“and some of the checks were made out to ‘Treasurer.’”

“Well, my dear,” the older woman responded as she

usually did when Cathy started to get on her nerves with lots

of questions, “we’re trying to bring in new businesses and

keep people from moving away. Of course we’re spending a

little more of those kinds of funds.” She looked at the clock.

“Look, I’ll tell you what. You look tired. Since it’s already

almost 3 p.m., why don’t you go home and get some rest. I’ll

talk with the mayor about these funds the next time I see

him, and I’ll try to get him to control his spending. Okay?”

Cathy felt a twinge of guilt, but then again, who was

she to argue with the boss? Kimberly let Cathy leave early

when she needed to, never docked her any pay, and never

expected her to make up the hours. And there was that new

restaurant that she has wanting to try. This account obviously

had a political agenda, so why not leave it to the politicians?

She’d go enjoy a quiet afternoon. It wasn’t until later that

day that she wondered if Kimberly had been trying to get

her out of the office for more than just politics.

TWO WEEKS BEFORE THE MEETING: WORKING WEEKENDS

Cathy smiled as she settled into her office chair, a hot chocolate

from a local coffee shop in one hand and a fresh donut in the

other. She loved coming to work on Monday mornings. How

many people could say that? Recently, Kimberly had started

providing hot chocolate and pastries every Monday to make the

day more pleasant, she claimed. Monday’s workload was also

lighter now. That’s because Kimberly had started coming in on

weekends to work on some of the more trivial projects, which

if left until Monday probably would have made the Monday

morning workload a nightmare.

Cathy had tried to argue with her a month before when she

had come in to find so much done. “I have nothing to do now

on Monday mornings. Besides, bookkeeping tasks are supposed

to be my job. Why don’t you let me take care of them?”

As always, Kimberly had laughed nervously and waved

her hand in the air. “You’re not a bookkeeper, Cathy.

Your job is to take care of the budgets, file the financial

records and make sure that we’re in compliance with local

ordinances. Nowhere in that description does it say that you

are supposed to do bookkeeping.”

“It says ‘other duties as assigned.’ I’d be happy to take care

of that stuff for you like I have been, as well as picking up the

mail like you’ve been doing. I’m supposed to make your life

easier, not leave you to take care of all of these little details.”

“Oh, Cathy,” Kimberly sighed. “To be honest, I wish I

could let you take care of this stuff. But the truth is that I’ve

started suffering from terrible insomnia on Sunday evenings.

I don’t know if it’s nerves about the politics and meetings

I know are starting the next day, or just a problem with my

bed. Maybe it’s the horses being restless. I don’t know. All I

know is that I can’t settle down on Sunday nights, so instead

of watching TV, I come in and get some work done. That

way, if I get some work accomplished, it makes me feel

better about the lack of sleep.”

“Well, why don’t you work on some of your own projects?

At least then you would be making headway and maybe

lighten your own workload for the coming week.”

Kimberly laughed nervously again. “My projects never

get done,” she said, shaking her head. “So, I work on yours.

Yours have a definite beginning and ending, and by the

time I get sleepy, I have a nice thick stack of invoices paid,

accounts reconciled, and checks printed.”

Cathy shrugged her shoulders. “Well, you’re the boss.

You can do what you want.”

“Thank you for noticing,” Kimberly said dryly.

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Cathy smiled then looked at Kimberly in concern.

“Maybe you should take a trip. You know, a nice vacation.

That would give you the opportunity to unwind and relax.”

“No!” Kimberly’s voice was sharp, then she mellowed. “No,

I can’t do that in this crisis. There are things I have to do myself.

With only the two of us in the office, only I can do them.”

“I am a CMA too, you know,” Cathy began, but Kimberly

cut her off with a wave of her hand.

“I know, but then I’d have to train you. It’s less work for

me to just do it myself.”

Cathy bit her tongue to keep from mentioning that

Kimberly would only have to do that once. After that,

she could have more time for her projects and have some

vacation time. Obviously, her boss didn’t want to think about

vacations right now. Knowing how much money Kimberly

earned, Cathy didn’t really understand why she didn’t take

more time to enjoy it. But she could sort of understand

Kimberly’s desire to help ease the financial crisis. Still,

given how slowly governments moved, even small town

governments, surely Kimberly had time to plan one weekend

vacation.

LATER THAT EVENING: TOUGH CHOICES

Cathy sat on the couch, looking out over the small meadow

behind her house. She didn’t even hear her husband,

George, come in or feel him sit down next to her.

“A penny for your thoughts?” he finally said quietly.

Cathy looked over at George and smiled. “They’re pretty

depressing thoughts. Perhaps, I should pay you for them

instead.” George just smiled back at her and she sighed.

“I’m a little worried about the town.”

“You mean the financial crunch?”

“Yeah, I think Kimberly might be behind it.”

“What?” George sounded shocked. “How could

Kimberly be behind it? She’s the hardest worker I know,

and she’s cut the department down to about nothing. I mean,

it’s just the two of you, right? And she does so much of the

work herself.

“I know, I know. I’m probably wrong.” She paused.

“But,” George added. “You’re afraid you’re right.” Cathy

nodded. “What do you think Kimberly’s doing, stealing from

the city?” he asked sarcastically.

“She could be!” Cathy protested. “And I have an

obligation to report a fraud if I find one.”

George shook his head with a smile. “Come on, Cathy.

Do you really think Kimberly would be involved in a fraud?

She’s one of the wealthiest people I know. She has that huge

ranch. What does she call it?”

“Stepping Stones Stallions.”

“Right. And it just keeps getting bigger. I mean, didn’t

she just add another champion stud?” Cathy nodded.

“Right, and look at the way she treats everyone. She takes

us to dinner, and takes you out for lunch all the time, buys

nice Christmas gifts for us and the kids, and what about

those expensive tickets for the horse show that she gave to

everyone in city hall? She’s loaded.”

“Maybe,” Cathy said, still sounding doubtful, “but she

doesn’t enjoy it.”

“What’s that supposed to mean?” George asked.

“Well, take that horse show you mentioned. She’s the

only one who didn’t go, other than the emergency staff.

She begged off at the last minute. And she never goes on

vacation or goes to races any more. I leave early and come in

a little late, because she insists that I do, but she’s working

all the time. Why doesn’t she ask me to help with all of the

work that needs to be done? It just doesn’t seem right.”

“Okay,” George agreed. “You’re right. She’s definitely

a workaholic. But that doesn’t mean she’s a criminal. Her

family’s been in the area for generations. They’re well-

respected but keep a low profile. Maybe she’s just spending

the family fortune.”

Cathy still looked concerned. “Well, what about the

recent audit? Wasn’t it one of the big firms? And didn’t they

sign off with only minimal issues? I know, I know. It was a

big regional firm, but they didn’t actually come to the offices

themselves. They hired a local CPA do the leg-work. He’s

done lots of small audits, but he isn’t really capable of doing

everything that needed doing if there’s a suspicion of fraud.

And there’s more to it than that. I told you about the DCDA

account that I found a few months ago, right?” George

nodded. “Well, I did a little more digging, and several of the

invoices that support the payments made from that account

look suspicious. The invoices are not on proper letterhead

and don’t have approved contracts. In fact, it looks like most

of the building projects didn’t even happen. Also, I found

several more checks made out to ‘Treasurer,’ and many of

them were not supported by invoices either. They add up to

a pretty large amount.”

“Well,” George threw up his hands, “if it bugs you that

much, then perhaps you should talk with the mayor or a

member of the city council about it. You won’t be able to

sleep until you do.”

Cathy shook her head. “How can I do that, George? What

if I’m wrong? I’d be slandering the best boss I’ve ever had.

It could be nothing, just coincidences. How can I report

something that might not even exist?”

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CASE QUESTIONS

In answering the following questions, use the Association of

Certified Fraud Examiners (ACFE) “The Fraud Triangle”

and the IMA Statement of Ethical Professional Practice for

guidance.1

1. The “fraud triangle” has been used to identify conditions

or circumstances that typically present in financial frauds.

It consists of three components, which together lead to

fraudulent behavior: (1) Perceived financial need, (2)

Perceived opportunity, and (3) Rationalization. Using the

fraud triangle, identify the internal control weaknesses

and fraud risk factors that were present in the case.

How might these risk factors and control weaknesses

contribute to a fraud?

2. What role can management accountants play in

preventing and detecting fraudulent activities and other

illegal activities?

3. Based on what Cathy has observed, do you think

Kimberly is doing something unethical? Do you think

Cathy is doing something unethical? Defend your

answers.

4. Who is being affected if Kimberly is embezzling funds?

Who is being affected by Cathy’s decision to keep her

concerns to herself?

5. Assume Cathy feels that Kimberly is doing something

wrong. What options does she have to handle the

situation? Provide at least three possible options. Which

of these options do you think would be the best? Why?

6. Assume that Cathy had confided her concerns to you and

her desire to come forward and report those concerns.

What arguments could you use to help support Cathy in

her decision? Provide at least three logical arguments.

7. What do you think Cathy should do in this situation?

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ABOUT IMA® (Institute of Management Accountants) IMA®, the association of accountants and financial professionals in business, is one of the largest and most respected associations focused exclusively on advancing the management accounting profession. Globally, IMA supports the profession through research, the CMA® (Certified Management Accountant) program, continuing education, networking and advocacy of the highest ethical business practices. IMA has a global network of more than 75,000 members in 140 countries and 300 professional and student chapters. Headquartered in Montvale, N.J., USA, IMA provides localized services through its four global regions: The Americas, Asia/Pacific, Europe, and Middle East/Africa. For more information about IMA, please visit www.imanet.org

1 “The Fraud Triangle,” Association of Certified Fraud Examiners (ACFE), http://

www.acfe.com/fraud-triangle.aspx; IMA Statement of Ethical Professional

Practice, IMA, http://www.imanet.org/docs/default-source/press_releases/

statement-of-ethical-professional-practice_2-2-12.pdf?sfvrsn=2