Reference no: EM132918759

Question - You are in your third year as an internal auditor with VXI International, manufacturer of parts, and supplies for jet aircraft. VXI 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 are deducted from employee paychecks each month for investment in one of the 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 began, 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, Mar. Maxwell (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."

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

2. Do you perceive an ethical dilemma? Explain.