Week 2 Discussion 1 and 2 - Jamie Acker

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Practice: Week 2 Discussion Question 1 (Due Wednesday 3/7)

ONLY ANSWER THE QUESTION HIGHLIGHTED IN GREEN

Review case United Thermostatic Controls

Respond to the following individually per grouping to answer the questions:

GROUPS are those individuals assigned a question. Not Teams or teaming. No copycat or collaborative postings.

Answer your assigned question. A different question answered or essay without the question answered will be considered off topic and result in zero grade.

Yellow group question

Evaluate the actions of Walter Hayward, CPA, company CFO who allowed the entries for the early shipments to Bilco. What safeguards might have prevented the subordination of his judgment to Campbell. Provide argumentative support from professional resources.

Blue group question

Evaluate the actions of the internal auditors and Tony Cupertino, CPA, with respect to meeting his ethical responsibilities to the trade and to the AICPA Code of Professional Conduct. Support your CPA arguments with expert CPA resources not the textbook.

Orange group question

How do the stated actions of the board and CEO as communicated by Sam Lorenzo match up with the ethics and values expected of corporations, top management, and the board of directors that were discussed in the chapter? What were some of the tensions and complications? Provide your analysis with appropriate support from peer reviewed resources.

Green group question

There may have been failures of ethics by Frank Campbell. Or not? Did he also fail his moral imperative? Describe some of the incidents or failings and what should have been appropriate safeguards according to the professional writing in the Journals of Ethics and the textbook.

Analytical Requirements: Introduce the situation (briefly). Define or situate on the theme from the textbook (cite and reference). Step through the elements using facts, logical reasoning, and appropriate responses as a CPA and member of the AICPA. Conclude on the theme.

Scope: Your original response should be 350-500 words in length and meet the APA and writing standards as shown in the CWE for Masters Level II. Follow up responses should be 150 words in length (graded under participation).

Professional references (no third party): Required: Content from the textbook, AICPA Code of Professional Conduct, a professional Accountancy journal from the United States of America, Accounting technical guidance for any factual assertions. Recommended: Peer reviewed ethical websites (not professor in courses websites), Journal of Business Ethics, and related literature.

Case 3-3 United Thermostatic Controls (a GVV case)

United Thermostatic Controls is a publicly owned company that engages in the manufacturing and marketing of residential and commercial thermostats. The thermostats are used to regulate temperature in furnaces and refrigerators. United sells its product primarily to retailers in the domestic market, with the company headquartered in Detroit. Its operations are decentralized according to geographic region. As a publicly owned company, United’s common stock is listed and traded on the NYSE. The organization chart for United is presented in

EXHIBIT 1

United Thermostatic Controls Organization Chart

Chart shows organization for United Thermostatic.

Frank Campbell is the director of the Southern sales division. Worsening regional economic conditions and a reduced rate of demand for United’s products have created pressures to achieve sales revenue targets set by United management nonetheless. Also, significant pressures exist within the organization for sales divisions to maximize their revenues and earnings for 2015 in anticipation of a public offering of stock early in 2016. Budgeted and actual sales revenue amounts, by division, for the first three quarters in 2015 are presented in Exhibit 2 .

EXHIBIT 2

United Thermostatic Controls—Sales Revenue, 2015 (1st 3Qs)

Budgeted and Actual Sales Revenue First Three Quarters in 2015
	U.S.A. Sales Division	Western Sales Division
Quarter Ended	Budget	Actual	% Var.	Budget	Actual	% Var.
March 31	$ 632,000	$ 638,000	.009%	$ 886,000	$ 898,000	.014%
June 30	640,000	642,000	.003	908,000	918,000	.011
September 30	648,000	656,000	.012	930,000	936,000	.006
Through September 30	$1,920,000	$1,936,000	.008%	$2,724,000	$2,752,000	.010%

Eastern Sales Division	Southern Sales Division
Quarter Ended	Budget	Actual	% Var.	Budget	Actual	% Var.
March 31	$ 743,000	$ 750,000	.009%	$ 688,000	$ 680,000	(.012)%
June 30	752,000	760,000	.011	696,000	674,000	(.032)
September 30	761,000	769,000	.011	704,000	668,000	(.051)
Through September 30	$2,256,000	$2,279,000	.010%	$2,088,000	$2,022,000	(.032)%

Campbell knows that actual sales lagged even further behind budgeted sales during the first two months of the fourth quarter. He also knows that each of the other three sales divisions exceeded their budgeted sales amounts during the first three quarters in 2015. He is very concerned that the Southern division has been unable to meet or exceed budgeted sales amounts. He is particularly worried about the effect this might have on his and the division managers’ bonuses and share of corporate profits.

In an attempt to improve the sales revenue of the Southern division for the fourth quarter and for the year ended December 31, 2015, Campbell reviewed purchase orders received during the latter half of November and early December to determine whether shipments could be made to customers prior to December 31. Campbell knows that sometimes orders that are received before the end of the year can be filled by December 31, thereby enabling the division to record the sales revenue during the current fiscal year. It could simply be a matter of accelerating production and shipping to increase sales revenue for the year.

Reported sales revenue of the Southern division for the fourth quarter of 2015 was $792,000. This represented an 18.6 percent increase over the actual sales revenue for the third quarter of the year. As a result of this increase, reported sales revenue for the fourth quarter exceeded the budgeted amount by $80,000, or 11.2 percent. Actual sales revenue for the year exceeded the budgeted amount for the Southern division by $14,000, or 0.5 percent. Budgeted and actual sales revenue amounts, by division, for the year ended December 31, 2015, are presented in Exhibit 3 .

During the course of their test of controls, the internal audit staff questioned the appropriateness of recording revenue of $150,000 on two shipments made by the Southern division in the fourth quarter of the year. These shipments are described as follows:

1. United shipped thermostats to Allen Corporation on December 31, 2015, and billed Allen $85,000, even though Allen had specified a delivery date of no earlier than February 1, 2016, to take control of the product. Allen intended to use the thermostats in the heating system of a new building that would not be ready for occupancy until March 1, 2016.

2. United shipped thermostats to Bilco Corporation on December 30, 2015, in partial (one-half) fulfillment of an order. United recorded $65,000 revenue on that date. Bilco had previously specified that partial shipments would not be accepted. Delivery of the full shipment had been scheduled for February 1, 2016.

EXHIBIT 3 United Thermostatic Controls—Sales Revenue, 2015 (4 Qs)

Budgeted and Actual Sales Revenue in 2015
	U.S.A. Sales Division	Western Sales Division
Quarter Ended	Budget	Actual	% Var.	Budget	Actual	% Var.
March 31	$ 632,000	$ 638,000	.009%	$ 886,000	$ 898,000	.014%
June 30	640,000	642,000	.003	908,000	918,000	.011
September 30	648,000	656,000	.012	930,000	936,000	.006
December 31	656,000	662,000	.009	952,000	958,000	.006
2015 Totals	$2,576,000	$2,598,000	.009%	$3,676,000	$3,710,000	.009%

	Eastern Sales Division	Southern Sales Division
Quarter Ended	Budget	Actual	% Var.	Budget	Actual	% Var.
March 31	$ 743,000	$ 750,000	.009%	$ 688,000	$ 680,000	(.012)%
June 30	752,000	760,000	.011	696,000	674,000	(.032)
September 30	761,000	769,000	.011	704,000	668,000	(.051)
December 31	770,000	778,000	.010	712,000	792,000	.112
2015 Totals	$3,026,000	$3,057,000	.010%	$2,800,000	$2,814,000	.005%

During their investigation, the internal auditors learned that Campbell had

pressured United’s accounting department to record these two shipments early to enable the Southern division to achieve its goals with respect to the company’s revenue targets. The auditors were concerned about the appropriateness of recording the $150,000 revenue in 2015 in the absence of an expressed or implied agreement with the customers to accept and pay for the prematurely shipped merchandise. The auditors noted that, had the revenue from these two shipments not been recorded, the Southern division’s actual sales for the fourth quarter would have been below the budgeted amount by $70,000, or 9.8 percent. Actual sales revenue for the year ended December 31, 2015, would have been below the budgeted amount by $136,000, or 4.9 percent. The revenue effect of the two shipments in question created a 5.4 percent shift in the variance between actual and budgeted sales for the year. The auditors felt that this effect was significant with respect to the division’s revenue and earnings for the fourth quarter and for the year ended December 31, 2015. The auditors decided to take their concerns to Tony Cupertino, director of the internal auditing department. Cupertino is a licensed CPA.

Cupertino discussed the situation with Campbell. Campbell informed Cupertino that he had received assurances from Sam Lorenzo, executive vice president of sales and marketing, that top management would support the recording of the $150,000 revenue because of its strong desire to meet or exceed budgeted revenue and earnings amounts. Moreover, top management is very sensitive to the need to meet financial analysts’ consensus earnings estimates. According to Campbell, the company is concerned that earnings must be high enough to meet analysts’ expectations because any other effect might cause the stock price to go down. In fact, Lorenzo has already told Campbell that he did not see anything wrong with recording the revenue in 2015 because the merchandise had been shipped to the customers before the end of the year and the terms of shipment were FOB shipping point.

At this point, Cupertino is uncertain whether he should take his concerns to Walter Hayward, the CFO, who is also a member of the board of directors, or take them directly to the audit committee. Cupertino knows that the majority of the members of the board, including those on the audit committee, have ties to the company and members of top management. Cupertino is not even certain that he should pursue the matter any further because of the financial performance pressures that exist within the organization. However, he is very concerned about his responsibilities as a CPA and obligations to work with the external auditors who will begin their audit in a few weeks. Page 180It is at this point that Cupertino learns from Campbell that the CFO of Bilco agreed to accept full shipment when the goods arrive in return for a 20 percent discount on the total price that would be paid on February 1, 2016. Cupertino asked Campbell how he had found out. It seems Campbell took the initiative to help solve the revenue problem by going directly to the Bilco CFO.

Questions

1. Identify the stakeholders in this case and their interests.

2. Describe the ethical and professional responsibilities of Tony Cupertino.

3. Assume you are in Cupertino’s position and know you have to do something about the improper accounting in the Southern sales division. Consider the following in crafting a plan how best to voice your values and take appropriate action:

· How can you get it done effectively and efficiently?

· What do you need to say, to whom, and in what sequence?

· What will the objections or pushback be, and then,

· What would you say next? What data and other information do you need to make your point and counteract the reasons and rationalizations you will likely have to address?

Practice: Week 2 Discussion Question 2 (Due Friday 3/9)

Review case 3.2 Amgen Corporation

Respond to the following:

Situate yourself as a CPA in your assigned Accounting firm. Review the events and especially what happened to O'Brien.

Identify the areas where the allegations by Shawn O'Brien and the alleged retaliation seem to contradict the principles and practices embodied in the code. Describe how your firm's corporate code would discourage these types of events and how the firm handles and promotes whistleblowing.

Analytical Requirements: Introduce the situation. Define or situate on the theme from the textbook (cite and reference). Step through the elements using facts, logical reasoning, and appropriate responses as a CPA and member of the AICPA. Conclude on the theme.

Scope: Your original response should be 350-500 words in length and meet the APA and writing standards as shown in the CWE for Masters Level II.

For assigned Accounting firm questions, specifically used and linked resources from the firm's website.

Case 3-2 Amgen Whistleblowing Case

Amgen, a Thousand Oaks, California–based company, has been dealing with lawsuits and whistle-blower claims for years over its marketing tactics. The following describes the lawsuits, language from the legal filings against Amgen, and a statement made by the company on October 24, 2012, about its settlements in its earnings announcement for the third quarter of 2012.

Whistleblower Shawn O’Brien

In 2009, the company was embroiled in lawsuits filed by 15 states alleging a Medicaid kickback scheme.i Two additional whistleblowing lawsuits were filed against the company in Ventura County. Former employees who said they had uncovered wrongdoing at the biotech giant and were terminated after they raised red flags to superiors brought the whistleblowing complaints, which don’t appear related to the fraud alleged by the group of states. One employee alleged the company violated federal law by under-reporting complaints and problems with the company’s drugs after they hit the market. The facts of that lawsuit are described below. Former Amgen employee Shawn O’Brien sued Amgen for wrongful termination on October 9, 2009, alleging he was laid off in October 2007 in retaliation for raising concerns about how the company reported complaints and problems with drugs already on the market. O’Brien worked as a senior project manager for Amgen’s “Ongoing Change Program,” according to the lawsuit filed in Ventura County Superior Court. His job was to improve Amgen’s “compliance processes with high inherent risk to public safety, major criminal and civil liability, or both,” according to the lawsuit.

The lawsuit alleged that in April 2007, Amgen’s board of directors flagged the company’s process for dealing with post-market complaints about drugs as a potential problem. Federal law requires drug companies to track and report to the Food and Drug Administration any problems with their drugs after they hit the market. In June 2007, O’Brien was put on the case. He soon uncovered facts that Amgen was not adequately and consistently identifying phone calls or mail related to post-marketing adverse events of product complaints. That year, O’Brien warned the company about the seriousness of the issues but, he claims, the company would not take any action or offer any support. In August 2007, O’Brien took his complaint to a senior executive/corporate officer (unnamed) and warned that Amgen’s process for dealing with post-market problems wasn’t adequate.

In early September of 2007, O’Brien’s managers instructed him to stop all work and not discuss the issues any further with anyone. Approximately four weeks later he was informed that he was being terminated as part of Amgen’s October 12, 2007, reduction in the work force.

Whistleblower Kassie Westmoreland

On October 22, 2012, Amgen announced it had set aside $780 million to settle various federal and state investigations and whistle-blower lawsuits accusing it of illegal sales and marketing tactics. Amgen said it had reached an agreement in principle to settle criminal and civil investigations that had been under way for several years by the United States attorney offices in Brooklyn and Seattle.

The company said a settlement, which it expected to be concluded in three to four months, would also resolve state Medicaid investigations and 10 whistle-blower lawsuits. It was not clear at the time if the company would plead guilty to any criminal charges. Most of the whistle-blower lawsuits remain under seal, but Amgen has said in regulatory filings that the lawsuits “allege that Amgen engaged in a wide variety of illegal marketing practices.”

The federal investigations, according to Amgen, seem to involve marketing, pricing and dosing of its anemia drugs, Aranesp and Epogen, and its dissemination of information about clinical trials on the safety and efficacy of those drugs. Numerous current and former executives have received civil and grand jury subpoenas, the company has said.

One whistle-blower lawsuit that was unsealed accuses the company of overfilling vials of Aranesp, essentially providing doctors with free amounts of the drug to give patients and then charge to Medicare, Medicaid or private insurers. The lawsuit said that Amgen tried to persuade doctors to use Aranesp, rather than Procrit, a rival drug sold by Johnson & Johnson, by pointing to the extra profits the doctors could make by using the overfill and billing for it. The lawsuit was filed by Kassie Westmoreland, a former Amgen sales representative and Aranesp product manager. The federal government declined to join the lawsuit, but more than a dozen states did join, including New York and California. Westmoreland would be entitled to part of any settlement under whistleblower statutes. In the past, Amgen has said the accusations were without merit.

During depositions in the case, five former Amgen executives invoked the Fifth Amendment against self-incrimination, according to court documents. That case had been scheduled to go to trial in the U.S. District Court in Boston on Oct. 17, 2012 but the trial was then called off, apparently because a settlement was near. “We are very encouraged by the agreement in principle and will comment further at the appropriate time,” lawyers for Westmoreland said.

Legal filings

The filing in the Kassie Moreland case includes the following statement by the court in response to how Amgen dealt with warnings of the Federal Drug Administration about the safety of its products:

In addition to causing damage to programs such as Medicare, Defendants’ actions have also put patient safety and health at risk. The population of patients for whom Aranesp is indicated is especially vulnerable. Though Amgen was aware of issues earlier, beginning on or about March 9, 2007, the FDA issued a series of black box warnings for Aranesp when used in kidney and cancer patients, the most serious warning available on a drug’s label. The black box warned of increased risk of death, of serious cardiovascular or thromboembolic events, and more rapid tumor progressions. The new warnings cautioned physicians to administer the lowest dose possible in order to bring red blood cell counts to the lowest level necessary to avoid blood transfusions. Concerns that, rather than helping patients, Aranesp can increase the risk of tumor growth and shorten survival in patients with cancer, and increase the risk of heart attack, heart failure, stroke, and blood clots in other patients, led the FDA to impose a Risk Evaluation and Mitigation Strategy on Amgen for Aranesp in February 2010.

One of Amgen’s responses to the black box warnings appears to have been to treat them as humorous. A script for a July 2007 meeting of Amgen’s Nephrology Business Unit from the files of Amgen Vice President of Sales Leslie Mirani included a joke about “black box warnings,” following up on the FDA’s February 2007 warning about potential harm from Aranesp.

Amgen Earnings Report for third quarter of 2012

Amgen revealed the agreement in its earnings announcement for the third quarter of 2012. It said the charge for the settlement reduced its third-quarter earnings by 77 cents a share after taxes. What follows is and extract from the actual earnings announcement.

“The Company has reached an agreement in principle to settle allegations relating to its sales and marketing practices arising out of the previously disclosed federal civil and criminal investigations pending in the U.S. Attorney's Offices for the Eastern District of New York and the Western District of Washington (the Federal Investigations). In connection with the agreement in principle, the Company recorded a $780 million charge in the third quarter of 2011, which, after taxes, reduced the Company's EPS and net income in accordance with U.S. generally accepted accounting principles (GAAP) for the third quarter of 2011 by $0.77 per share and $705 million, respectively. If the ongoing settlement discussions are successfully concluded, Amgen expects that the proposed settlement will resolve the Federal Investigations, the related state Medicaid claims and the claims in U.S. ex rel. Westmoreland v. Amgen, et al. and the other nine qui tam actions [under the U.S. False Claims Act] previously described in the Company's periodic filings with the U.S. Securities & Exchange Commission. The proposed settlement remains subject to continuing discussions regarding the components of the agreement and the completion and execution of all required documentation; until the proposed settlement becomes final, there can be no guarantee that these matters will be resolved by the agreement in principle.”