RUNNING HEAD: F&C International, Inc. 1
Case Analysis: Ethical Responsibility Assignment-F&C International, Inc.
David S. Saunders
School of Business, Liberty University
ACCT 622 Advanced Auditing
Dr. Kuhn
July 23, 2025
F&C International, Inc. background information
F&C International was founded by Mr. Alex Fries who emigrated to the United States
from Germany in the 1800s (Knapp, 2022). After he arrived in Ohio, he went to work for a
distillery, and his background as a chemist provided much needed experience to the distillery he
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went to work at (Knapp, 2022). In 1854, Mr. Fries and his brother started their own company
that provided flavorings to whiskey makers in Kentucky (Morning Journal, 2021).
Starting with Mr. Fries, Cincinnatti became a leader in flavors production in the United
States. In the 1900s, Alex Fries Inc. became Fries & Fries, and this was operated by Mr. Robert
Fries (Morning Journal, 2021). Another one of Mr. Fries company’s Cino Co., became a part of
F&C International in the 1920s (Morning Journal, 2021). The company went public in the 1980s,
but an accounting scandal forced it into bankruptcy in the early 1990s (Morning Journal, 2021).
F&C International accounting fraud
In the 1980s, F&C International, Inc. was headed by Mr. Jon Fries. Mr. Fries was
responsible for a major financial fraud that led to the bankruptcy of the company (Knapp,
2022). Additionally, more than 10 other F&C executives were involved in this scam, or they did
not try to stop it (Knapp, 2022). Fries and his colleagues embellished the company’s periodic
financials. This was done by inflating its revenues as well as overstating its period-ending
inventories (Knapp, 2022). In the early 1990s, F&C overstated its sales by backdating sales
transactions, as well as shipping customers items, they did not order, and recording sales that
did not exist
(Knapp, 2022). The inventory was overstated by employees of F&C, who loaded barrels with
water, and then these barrels were added to its inventory (Knapp, 2022). Lastly, the company
did not remove defective items from its financial records, and it included waste products that
were a part of the manufacturing process in its inventory (Knapp, 2022).
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The executives at F&C used their erroneous financial statements to sell equity securities,
as well as to obtain financing from banks (Knapp, 2022). As the fraud progressed, Mr. Fries and
his top executives failed to implement sales and inventory management strategies. Then F&C
tried to fix this issue by creating an imaginary warehouse known as Warehouse Q (Knapp,
2022). “Warehouse Q became the accounting repository for product returned by customers for
being below specification, unusable or nonexistent items, and items that could not be found in
the actual warehouses” (Knapp, 2022).
Mr. Fries was the President, CEO, and managing director of F&C Intl. His responsibilities
were to facilitate business outside of the company, while guiding its employees and other
officers towards the main objective of the company (Knapp, 2022). Mr. Fries dealt with F&C’s
external auditors, and he mislead them as mentioned before by creating false financial records,
non-existent inventory, and he prevent others from exposing this fraud (Knapp, 2022).
Mr. Fletcher Anderson was the COO, as well as a member of F&C’s board of directors.
Mr. Anderson was responsible for F&C’s operations, its management resources, the distribution
of goods and services to its customers, and ensured that an analysis of systems was conducted
(Knapp, 2022). Mr. Anderson later became the president and CEO of F&C International, Inc.
Mr. Anderson, along with F&C’s controller, had extensive dealings with the external auditors.
They were responsible for providing all financial documents that the auditors requested as well
as answering their questions as they came up. However, they never disclosed to the auditors
what was going on at F&C International, Inc.
F&C International, Inc. 4
Mr. Craig Shuster was the CFO of F&C International, Inc (Knapp, 2022). Mr. Shuster
managed financial risks, financial planning, financial record keeping for F&C International, Inc.,
and financial reporting to the board of directors (Knapp, 2022). Mr. Shuster also signed off on all
statements that were filed with the SEC. Additionally, Mr. Shuster dealt with F&C International
Inc.’s auditors, but he never disclosed any of the fraudulent activity that was going on.
Ms. Catherine Sprauer, CPA oversaw the Management Discussion and Analysis (MD&A)
division of F&C International, Inc. (Knapp, 2022). Then Ms. Sprauer accepted the position of
Divisional Controller for F&C’s Flavor Division. She was involved with the preparation of
MD&A sections of F&C financial reports that were submitted to the SEC (Knapp, 2022). Ms.
Sprauer was advised by a few employees at F&C International Inc. about the overstated
inventory, and she was also provided with a list of those who were involved in this scheme
(Knapp, 2022). Unfortunately, Ms. Sprauer did not inform her supervisor or those above her, or
accountants within her department, or the external auditors about this matter (Knapp, 2022).
The SEC reprimanded Ms. Sprauer, Mr. Anderson, and Mr. Shuster for inaccurate and
misleading financial reports. Mr. Anderson and Mr. Schuster were also reprimanded for not
implementing proper internal controls. All these individuals pledged not to run afoul of the law
F&C International Inc. 5
(Knapp, 2022). F&C International, Inc., in 1993 filed Chapter 11 bankruptcy, and a reorganization
plan was approved by the Court on March 31, 1994 (Securities and Exchange Commission,
2009). The plan called for the transfer of almost all F&C’s assets to another company that
purchased them, and the company ended on July 2, 1994 (Securities and Exchange Commission,
2009). Finally, Mr. Fries went to prison for 15 months (Securities and Exchange Commission,
2009).
Answer to question 1
Question 1: Jon Fries (CEO), Fletcher Anderson (COO), Craig Schuster (CFO), and Catherine
Sprauer (division controller) were the four central figures in this case. Identify the key
responsibilities associated with the professional roles these individuals occupied. Briefly
describe the type and extent of interaction each of these individuals likely had with F&C’s
independent auditors.
The key responsibilities and roles of Mr. Fries, Mr. Anderson, Mr. Schuster, and Ms.
Sprauer were as follows:
•Mr. Fries was the CEO, and he was responsible for providing the company’s mission
objectives that would also include goals as well. Additionally, he was responsible for
making important decisions, and the company’s representative to its shareholders. Mr.
Fries would also play an important part in the selection of the company’s external
auditor, as well as providing the external auditors with information as to how decisions
are made on a variety of topics.
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•Mr. Anderson was the CEO, and he would have overseen the daily activities of the
company. Additionally, Mr. Anderson would have overseen the implementation of
policies and procedures such as ISO as they were a manufacturer. Mr. Anderson would
have possibly been involved with the external auditors as they would have met with him
to discuss internal controls of the company.
•Mr. Schuster was the CFO, and he would have overseen all financial reporting activities
and that would have included public filings such as a 10-q with the SEC. Additionally, Mr.
Schuster would have been overseeing all financial operations and activities within the
company. He would have also been responsible for the implementation of all internal
control policies and procedures. His involvement with the external auditors would have
dealt with all financial activities and financial planning and strategy. The auditors would
have also dealt with him with respect to all the issues encountered in the audit, and he
would have been the first person to see their report.
•Ms. Sprauer was the division controller, and she would have been responsible for all
accounting compliance activities, as well as working with the CFO to ensure all financial
reporting and regulatory reporting were accurate as well as prepared and filed on a
timely basis. She would have also worked with other departments to ensure inventory
and purchasing policies and procedures were implemented. Her involvement with the
external auditors would have dealt with all these matters, and she would have been the
director of all their requests for information.
As mentioned before, the CFO and controller are responsible for the safeguarding of the
company’s financial integrity via internal controls and audits (Accounting Insights Team, 2025).
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This would have also meant that policies and procedures would be in place to handle the
receiving of inventory, proper inventory accounts, proper controls for accounts receivables and
accounts payables (Accounting Insights Team, 2025). Both the controller and the CFO would
have been involved with the implementation of an accounting software package like SAP or
Oracle (Accounting Insights Team, 2025).
Answer to question 2
Question 2: Using the scale shown here, evaluate the conduct of the four key individuals
discussed in this case. Be prepared to defend your answers.
Highly Unethical l-(-100)----------------0----------------(100)-l Highly Ethical
Jon Fries, the CEO, has a score of -100. He was the mastermind of the fraud that
occurred at F&C International. He orchestrated the scheme to inflate revenues as well as the
overstatement of its inventory with a non-existent warehouse. Additionally, he orchestrated the
fraudulent practices of backdating sales transactions, as well as shipping orders to customers
who did not order these items.
Fletcher Andreson, the COO, has a score of -70. Although he was not a part of the system
that created this fraudulent situation, he did become aware of suspicious activity while he was
COO, and he discovered inappropriate accounting practices, but he turned a blind eye to it. He
was very careful not to implicate himself when he requested that the divisional controller not
elaborate on the issue of incorrect financial statements and records when she resigned. This way
Mr. Anderson could claim ignorance in this matter.
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Craig Schuster, the CFO, has a score of -25. Mr. Schuster found out above the fraudulent
practices and activities in the company’s operations as well as its accounting records. However,
he tried to explain the discrepancies in the financial records. He drafted a list that contained
$1.5 million dollars of non-existent inventory from the imaginary warehouse (Warehouse Q) and
sent it to Mr. Anderson. This was his way of making Mr. Anderson aware of this issue, so this
matter reduced his unethical score to -25. However, he was responsible for certifying the
financial statements and required reporting to the SEC, and he knew the information was
incorrect.
Catherine Sprauer, who was the divisional controller, has a score of -60. She found out
about the fake warehouse “Q” after she came onboard with the company. She also found out
about barrels filled with water that were recorded as inventory. She also found out that her
higher ups were involved with this situation, but she decided not to communicate anything
verbally or in writing on this matter. Additionally, she failed to report her findings to the CFO, as
well as the board of directors for F&C International, Inc. An employee in the company tried to
provide her with a list of non-existent inventories, but she refused to take the document.
However, she did warn the COO about the inventory issues as well as the inaccuracy of the
company’s financial statements when she resigned.
Answer to Question 3
Question 3: For a moment, step into the shoes of Catherine Sprauer. What would you have
done during and following each of the confrontations she had with the two employees who
insisted that F&C executives were involved in a fraudulent scheme to misrepresent the
company's financial statements?
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If I was the divisional controller, and I received information from employees about the
inventory mess that was going on, I would have reviewed the information and investigated it to
see if it was legitimate. A simple cycle count and or review of the items in the warehouse could
have verified this information. Ms. Sprauer had a fiduciary duty to do this as this was a public
company, and financial reports need to be accurate. Once I verified that this information was
correct, I would have communicated this to the CFO, and if he would not act on it, I would have
informed the board of directors. At that point, I would have to decide whether to resign from
the company if action was not taken. I would have kept a paper trail of my communication so
that I could protect myself in the event anything happened. As an accountant I have a duty to
make sure everything is accurate and if it is not, and others do not want to fix this, then I have a
duty to inform, and then extricate myself from the matter.
Answer to Question 4
Question 4: Craig Schuster resigned as F&C’s CFO on January 1, 1993. Apparently, Schuster did
not reveal to any third parties the concerns he had regarding F&C’s accounting records and
previous financial statements. In your opinion, did Schuster have a responsibility to inform
someone of those concerns following his resignation? Defend your answer.
Mr. Schuster should have expressed his concerns in writing prior to his resignation. When
he discovered what was going on, he had a duty to do so as he was responsible for financial
reporting and compliance. A CFO must ensure compliance is done properly and accurately, as he
not only has to report to the company’s board of directors, but he also must report to the
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company’s external stakeholders, in this case investors who owned stock in the company (Egon
Zehder, 2024). This was crucial as he was signing off on reports submitted to the SEC. Once he
discovered what was going on, and the COO Mr. Anderson refused to take any action, he should
have informed the audit committee as well as the board of directors. If they refused to take any
action, he should have resigned and listed his reasons in his resignation letter, informed the
external auditors, and notified the SEC as to what was going on with the company.
Answer to Question 5
Question 5: Assume that you, rather than Fletcher Anderson, were F&C’s COO in December
1992. What would you have done upon receiving the list of Warehouse Q inventory from
Craig Schuster?
If I was the COO and I received information about the “Warehouse Q” inventory list from
the CFO, I would have done the following:
•I would have ordered an inventory count of all F&C’s inventory immediately.
•I would have then compared it to what was shown in our accounting system.
•I would have then determined how many barrels had only water in them.
•Once I had all of this information, I would have brought in our external auditors to verify
our findings, and then reported it to the audit committee and board of directors, and
then correcting entries to our statements would have been made, as well as reported in
filings to the SEC.
•Lastly, I would have ordered an investigation into how this happened, and anyone still
with the company would have been terminated, procedures would have been
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implemented to prevent this in the future, and those who committed this fraud would
have been reported to the proper authorities for further investigation and prosecution.
Christian worldview of F&C International, Inc.
The fiasco at F&C International, Inc. dealt with the following issues: greed, deception,
fraud, and lack of transparency. This incident occurred before Sarbanes-Oxley was
implemented, but its requirements should have been followed. For example, Section 302
requires “public companies to file regular reports with the SEC, and its top executives must
vouch for the information in these reports, as well as they are responsible for the
implementation of internal controls of data” (Fruhlinger, 2020). Secondly, Section 409 requires
any material changes in the financial situation or operation of the company to be disclosed to
the public as soon as possible (Fruhlinger, 2020). Lastly, Section 404 required auditors to sign off
on the internal controls of the company (Fruhlinger, 2020).
The Bible discusses greed, deception, fraud, and lack of transparency in the following
passages in the Bible:
•1 Timothy 6:9 (ESV) states the following: “But those who desire to be rich fall into
temptation, into a snare, into many senseless and harmful desires that plunge people
into ruin and destruction” (Crossway Bibles, 2001).
•Proverbs 10:9 (ESV) states the following: “Whoever walks in integrity walks securely, but
he who makes his ways crooked will be found out” (Crossway Bibles, 2001).
•Proverbs 20:17 (ESV) states the following: “Bread gained by deceit is sweet to a man, but
afterward his mouth will be full of gravel” (Crossway Bibles, 2001).
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•Proverbs 11:3 (ESV) states the following: “The integrity of the upright guides them, but
the crookedness of the treacherous destroys them” (Crossway Bibles, 2001).
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REFERENCES
Accounting Insights Team. (2025, Feb. 11). What Does a CFO Accountant Do? Key
Responsibilities Explained. Retrieved from: https://accountinginsights.org/what-does-
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Crossway Bibles. (2001). 1 Timothy 6:9 (ESV). Retrieved on July 27, 2025, from:
https://www.openbible.info/topics/greed.
Crossway Bibles. (2001). Proverbs 10:9 (ESV). Retrieved on July 27, 2025, from:
https://www.openbible.info/topics/deception.
Crossway Bibles. (2001). Proverbs 11:3 (ESV). Retrieved on July 27, 2025, from:
https://www.openbible.info/topics/transparency.
Crossway Bibles. (2001). Proverbs 20:17 (ESV). Retrieved on July 27, 2025, from:
https://www.openbible.info/topics/fraud.
Egon Zehder. (2024). Chief Financial Officer Roles and Responsibilities: Navigating the Shift.
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