Reference no: EM132958029

You are in your third year as internal auditor with TXY Enterprises, manufacturer of parts and supplies for jet aircrafts. TXY began a defined contribution pension plan three years ago. The plan is a so-called 401(k) plan (named after the Tax Code section that specifies the conditions for the favorable tax treatment of these plans) that permits voluntary contributions by employees. Employees' contributions are matched with one dollar of employer contribution for every two dollars of employee contribution. Approximately $500,000 of contributions is deducted from employee paychecks each month for investment in one of three employer-sponsored mutual funds.

• While performing some preliminary audit tests, you happen to notice that employee contributions to these plans usually do not show up on mutual fund statements for up to two months following the end of pay periods from which the deductions are drawn. On further investigation, you discover that when the plan was first begun, contributions were invested within one week of receipt of the funds. When you question the firm's investment manager about the apparent change in the timing of investments, you are told, "Last year Mr. Mathews (the CFO) directed me to initially deposit the contributions in the corporate investment account. At the close of each quarter, we add the employer matching contribution and deposit the combined amount in specific employee mutual funds."

Required:

Problem 1: What is Mr. Mathew's apparent motivation for the change in the way contributions are handled?

Problem 2: Does this practice pose an ethical dilemma? If it does, describe the dilemma. If not, why not?

Problem 3: What position, department, or outside parties would be affected by this situation?

Problem 4: If you were the internal auditor, what action would you consider in this situation?