SOLUTION: MAN 3240 Eastern Florida State College Motivation Discussion Questions

Please answer the question at the end?

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.Page 177EXHIBIT 1United Thermostatic Controls Organization Chart*Member of the board of directors.[D]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.Page 178EXHIBIT 2United Thermostatic Controls—Sales Revenue, 2015 (1st 3Qs) Budgeted and Actual Sales RevenueFirst Three Quarters in 2015 U.S.A. Sales DivisionWestern Sales DivisionQuarter EndedBudgetActual% Var.BudgetActual% Var.March 31$ 632,000$ 638,000.009%$ 886,000$ 898,000.014%June 30 640,000 642,000.003 908,000 918,000.011September 30 648,000 656,000.012 930,000 936,000.006Through September 30$1,920,000$1,936,000.008%$2,724,000$2,752,000.010% Eastern Sales DivisionSouthern Sales DivisionQuarter EndedBudgetActual% Var.BudgetActual% Var.March 31$ 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: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.United shipped thermostats to Bilco Corporation on December 30, 2015, in partial (one-half) fulfillment of an order. United recorded $65,000 revenue on that date. Bilco had previously specified that partial shipments would not be accepted. Delivery of the full shipment had been scheduled for February 1, 2016.Page 179EXHIBIT 3United Thermostatic Controls—Sales Revenue, 2015 (4 Qs) Budgeted and Actual Sales Revenue in 2015 U.S.A. Sales DivisionWestern Sales DivisionQuarter EndedBudgetActual% Var.BudgetActual% Var.March 31$ 632,000$ 638,000.009%$ 886,000$ 898,000.014%June 30640,000642,000.003 908,000918,000.011 September 30648,000656,000.012 930,000 936,000.006 December 31656,000662,000.009 952,000 958,000.006 2015 Totals$2,576,000$2,598,000.009%$3,676,000$3,710,000.009% Eastern Sales DivisionSouthern Sales DivisionQuarter EndedBudgetActual% Var.BudgetActual% Var.March 31$ 743,000$ 750,000.009%$ 688,000$ 680,000(.012)%June 30752,000760,000.011 696,000674,000(.032) September 30761,000769,000.011 704,000668,000(.051) December 31770,000778,000.010 712,000792,000.112 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.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.

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