Coupon Accounting Abuse

The incentive, opportunity, and rationalization to commit fraud have plagued business organizations
for many years. There are numerous ways that managers and employees can commit fraud. This
makes it a necessity for businesses to have quality internal controls that help prevent fraudulent
activity. However, even with the best set of controls businesses are still susceptible of fraud. This
paper will concentrate on the case study concerning coupon accounting abuse and will answer
questions pertaining to company controls, ways to prevent coupon abuse, parties who may be
harmed, and the type of fraud presented in the case.

Coupon Accounting Abuse Question 1: Discuss whether the situation described can happen to a
company with a good control environment. It is imperative for a company to have good accounting
internal controls. A company that has a good control environment will help deter fraud, but these
controls can only provide a company with reasonable assurance. In this situation the brand manager
is committing the fraud. This would make it very hard even for a company with good controls to detect
fraud. In what is known as management override, managers can simply circumvent a company’s
internal controls.

Question 2: Describe any steps a company could take to prevent such abuse. There are many steps
that a company can take to prevent fraud abuse. A company should implement a strong code of
ethics policy. Every manager and employee should be trained and very aware of the policy. This will
help in maintaining the integrity of the workforce. There should be a strong screening process that
includes background checks to help ensure the company is hiring honest employees. There should
also be a segregation of duties.

In this case the brand manager has complete control over estimating the coupon liability. This
estimate should be approved by another manager at the company. The company should inform
independent and internal auditors of the significance that coupons can have on the company’s
financial statements. A risk management group should be established whose task is to facilitate and
co-ordinate the overall risk management process. Depending on the size and nature of the
organization, the risk management group may be in the form of a committee who meet from time to
time (CIMA, 2009).

Question 3: List those parties who might be harmed by this situation. Fraud is often mistakenly
considered a victimless crime. However, fraud can have considerable social and psychological effects
on individuals, businesses and society (CIMA, 2009). In this situation the brand manager is harming
multiple parties. When the manager replaces the 4% estimated redemption rate with 2% he is
increasing revenue making the company look more profitable than it really was.

This is misleading to managers and shareholders who are reading the financial statements. It could
be detrimental to the business if managers think a brand is doing better than it really is. The
shareholder will also be impacted in the coming year because of the added liability expenses. The
brand manager is putting himself at risk to be harmed because if he is caught his job will be
terminated and he will be prosecuted. Question 4: Do you consider this example to be management
fraud or employee fraud?

I consider this to be management fraud. Management fraud often involves senior or high level
management’s intentional misrepresentation of financial statements, theft or improper use of
accompany resources. Employee fraud involves a non-senior employee theft or improper use of
company resources (Gottlieb, 2011). The fraud that was committed was by the brand manager who
developed a myopic view and knew that he would be managing another brand in the next year. This
situation is becoming increasingly common in the workplace.

In order to combat fraud and white collar crime in businesses, a concerted effort must be exerted by
the management of the business, the external auditors, and by all employees of the business.
Everyone must realize that fraud is not a victimless crime. The cost of fraud and theft are shared by
all through higher costs and lower corporate profits. Through adequate internal controls by
management, better working environments for employees, more stringent requirements for external
auditors, and codes of ethics for employees, everyone can start to combat frauds and defalcations
within corporate America (Farrell, Franco, 1999).

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