Reference no: EM13706060

The extensive case deals with Johnson Manufacturing and managerial accounting fraud. Johnson Manufacturing, a diversified manufacturer, has seven divisions that operate in the United States, Mexico, and Canada. Johnson Manufacturing has his-torically allowed its divisions to operate independently.

Corporate intervention occurs only when planned re-sults are not obtained. Corporate management has high integrity, although the board of directors is not very active. Johnson has a policy of performing employee screenings on all employees before hiring them. John-son feels its employees are all well educated and honest.

The company has a code of conduct, but there is little monitoring of employees. Employee compensa-tion is highly dependent on the performance of the company. During the past year, a new competitor has entered one of Johnson's highly successful markets. This new competitor has undercut Johnson's prices. Johnson's manager of this unit, Debbie Harris, has responded by matching price cuts in hopes of maintaining market share.

Debbie is very concerned be cause she cannot see any other areas where costs can be reduced so that the division's growth and profitability can be maintained. If profitability is not maintained, the division man-agers' salaries and bonuses will be reduced. Debbie has decided that one way to make the divi-sion appear more profitable is to overstate inventory, since it represents a large amount of the division's bal-ance sheet. She also knows that controls over inventory are weak. She views this overstatement as a short- run solution to the profit decline due to the competitor's price cutting.

The manager is certain that once the competitor stops cutting prices or goes bankrupt, the misstatements in inventory can be corrected with little impact on the bottom line. Considering Extensive Case 3, address the following questions in the form of a short essay:

What factors in Johnson's control environment led to and facilitated the manager's manipulation of inventory?

What pressures did Harris feel in deciding to overstate inventory?

What rationalization did Harris use to justify her fraud?

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