Case 3-3 United Thermostatic Controls;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 San Jose, California. Its operations are decentralized according to geographic region. As a publicly owned company, United's common stock is listed and traded on the New York Stock Exchange. The organization chart for United is presented in Figure 1.;Figure 1;United Thermostatic Controls Organization Chart;Frank Campbell is the director of the Southern sales division. Worsening regional economic conditions and a reduced 129130 rate of demand for United's products together have created pressures to nonetheless achieve sales revenue targets set by United management. Also, significant pressures exist within the organization for sales divisions to maximize their revenues and earnings for 2010 in anticipation of a public offering of stock early in 2011. Budgeted and actual sales revenue amounts, by division, for the first three quarters in 2010 are presented in Exhibit 1.;Exhibit 1;United Thermostatic Controls;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 2010. 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, 2010, 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 year-end 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 2010 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.5 percent. Budgeted and actual sales revenue amounts, by division, for the year ended December 31, 2010, are presented in Exhibit 2.;Exhibit 2 United Thermostatic Controls;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, 2010, and billed Allen $85,000, even though Allen had specified an earliest delivery date of February 1, 2011, 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, 2011.;2. United shipped thermostats to Bilco Corporation on December 30, 2010, 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, 2011.;During their investigation, the internal auditors learned that Campbell had placed pressure on 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 2010 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, 2010, 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, 2010. The auditors decided to take their concerns to Tony Cupertino, director of the internal auditing department. Cupertino is a licensed CPA and holds the certified internal auditor (CIA) designation.;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. The company, according to Campbell, 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 2010, since the merchandise had been shipped to the customers before year-end 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 chief financial officer, 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 and obligations to coordinate the work of the internal auditing department with that of the external auditors.;Questions;1. Describe the ethical responsibilities of Tony Cupertino as a CPA and CIA.;2. Explain how a strong corporate governance system should work to enhance the accuracy and reliability of the December 31, 2010, financial statements. Does the corporate governance system at United appear to comply with;a. Provisions of the Sarbanes-Oxley Act? Explain.;b. NYSE corporate governance guidelines? Explain.;3. Assume Tony Cupertino decides to delay contacting Walter Hayward and, instead, Cupertino contacts the CFO of Bilco Corporation and offers a 20 percent discount on the total $130,000 cost of merchandise if Bilco agrees to approve the partial shipment on December 30, 2010. Cupertino adds that the $26,000 would be deducted from the remaining $65,000 to be shipped during January 2011. Evaluate Cupertino's actions with respect to the following;a. Is the offer ethical or unethical? Why?;b.. Has Cupertino violated any of his reporting responsibilities in directly contacting the CFO of Bilco?
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