Q Submit responses to the following Cases/Readings by Sunday at 11:59 p.m.: • Case 4.4 1. Explain the gradual drift of Ms. Winters, and discuss her justification for the drift. 2. Some have suggested that Walmart should not prosecute Ms. Winters because of her circum- stances. Walmart loses $3 billion per year to employee theft of merchandise. Are there stakeholders involved in this decision? 3. The police report indicates that Ms. Winters has never had any legal charges filed against her. Police could not locate any parking tickets or moving violations in Indiana or Arizona. Explain what happened that would cause Ms. Winters to take the food. • Case 4.6 1. Describe the risks in earnings management. 2. What are the motivations for moving around expenses and revenues in quarters and years? 3. Don’t shareholders benefit by earnings management? Who is really harmed by earnings management? 4. Put earnings management into one of the ethical categories you have learned. 5. Make up a headline description of earnings management. 6. How do you respond to a CFO who says, “Everybody does earnings management. If I don’t do it, I am at a disadvantage.” • Reading 4.9 1. Using what you have learned from the reading, describe the use of steroids in professional baseball, and determine how the practice became so pervasive in the industry. 2. Explain what must be fixed at the company level that is different from the fixes for individual ethical lapses. 3. Provide a list of other examples of peer pressure that result in industry-level choices. 4. Refer back to Unit I to classify the cases there according to their layer type of ethical issue. • Case 4.21 1. With regard to the destruction of the documents, was there a difference between what was legally obstruction of justice and what was ethical in terms of understanding what was happening at Enron? When the U.S. Supreme Court reversed the Andersen decision, the Wall Street Journal noted that the Andersen case was a bad legal case and a poor prosecutorial decision on the part of the Bush administration. Why do you think the prosecutors took the case forward? What changes under SOX would make the case easier to pursue today? 2. David Duncan was active in his church, a father of three young daughters, and a respected alumnus of Texas A&M. Mr. Duncan’s pastor talked with the New York Times following Enron’s collapse and Duncan’s indictment, and discussed with the reporter what a truly decent human being Duncan was. What can we learn about the nature of those who commit these missteps? What can you add to your credo as a result of Duncan’s experience? Was the multimillion-dollar compensation he received a factor in his decision-making processes? Can you develop a decision tree on Duncan’s thought processes from the time of the first SPE until the shredding? Using the models you learned in Units 1 and 2, what can you see that he missed in his analysis? 3. In 2000, a full two years before WorldCom’s collapse, Steven Brabbs, WorldCom’s director of international finance and control, who was based in London, raised objections when he discovered after he had completed his division’s books for the year that $33.6 million in line costs had been dropped from his books through a journal entry. He was told that the changes were made pursuant to orders from CFO Scott Sullivan. He next suggested that the treatment be cleared with Arthur Andersen. When there was no response to his suggestion that the external auditor be consulted, Mr. Brabbs again raised his objections in a meeting with internal financial executives a few months later. Following the meeting, Mr. Brabbs was chastised by World- Com’s controller for raising the issue again. The following quarter, Mr. Brabbs received orders from WorldCom headquarters to make another similar change, but to do so at his level rather than having it done from corporate headquarters via journal entry. Unwilling to have the entries generate from his division, he created another entity and transferred the costs to it. He voiced his concerns again and was told that there was no choice because the accounting was a “Scott Sullivan directive.” Mr. Brabbs also had a meeting with Arthur Andersen auditors to discuss his concerns. Following the meeting he received an e-mail from WorldCom’s controller, David Myers, which directed that Mr. Brabbs was “not [to] have any more meetings with AA for any reason.” When WorldCom’s internal audit staff began to raise questions about the reserves and the capitalization of ordinary expenses, they were prohibited from doing further work and, for the most part, worked nights and weekends to untangle the accounting nightmare they had first discovered with a simple question about receipts for some capitalized expenses. CFO Scott Sullivan asked the audit staff to wait at least another quarter before continuing with their investigation. Andersen auditors reported any internal audit inquiries to Sullivan and did not follow through on questions and concerns raised. What controls were missing? Why the reporting lines to Sullivan? 4. One of the tragic ironies to emerge from the collapse of Arthur Andersen, following its audit work for Sunbeam, WorldCom, and Enron, was that it had survived the 1980s savings-and-loan scandals unscathed. In Final Accounting: Ambition, Greed and the Fall of Arthur Andersen, the following poignant description appears: “The savings- and-loan crisis, when it came, ensnared almost every one of the Big 8. But Arthur Andersen skated away virtually clean, because it had made the decision, years earlier [,] to resign all of its clients in the industry. S&Ls for years had taken advantage of a loophole that allowed them to boost earnings by recording the value of deferred taxes. Arthur Andersen accountants thought the rule was misleading and tried to convince their clients to change their accounting. When they refused, Andersen did what it felt it had to: It resigned all of its accounts rather than stand behind accounting that it felt to be wrong.” What takes a company from the gold standard to indictment and conviction?