Reference no: EM13902815

Motives and opportunities for fraud. A report on the ‘‘income transferal'' activities at the H. J. Heinz Company made the following statements. First, decentralized authority is a central principle of the company's operations. Second, the company expected its divisions to generate an annual growth in profits of approximately 10 to 12 percent per year. Third, it was neither unusual nor undesirable for management to put pressure on the division managers and employees to produce improved results.

The report noted that putting pressure on the divisions to produce improved results coupled with the company's philosophy of autonomy, which it extended to financial and accounting controls, provided both an incentive and an opportunity for division managers to misstate financial results. The report further noted that the autonomous nature of the divisions combined with the relatively small corporate headquarters financial staff permitted a communications gap. In its simplest form, corporate management seemed to issue an order or set a standard with respect to achieving a financial result without regard to whether it was possible to achieve that result. The management of certain divisions had a feeling of ‘‘us versus them'' toward corporate headquarters.

The report indicated there was an effort in certain divisions to transfer income from one fiscal period to another to provide a ‘‘financial cushion'' for achieving the goal for the succeeding year. For example, divisions would overpay expenses so that they could get a credit or refund in a subsequent year. Or they would pay an expense such as insurance or advertising early, but instead of charging the amount to a prepaid expense account, they would charge the amount to expense. In good years, this practice would keep profits down and provide a cushion to meet the company's target for constantly increasing profits.

a. Using your own numbers, construct an example to demonstrate the kind of income transferal that was done at H. J. Heinz.

b. What was the motive to transfer income from one period to the other? What were the opportunities to transfer income?

c. Comment on how the communications gap and the ‘‘us versus them'' attitude contributed to the fraud.

d. Refer to c. Have you seen communications gaps in organizations that have resulted in an ‘‘us versus them'' attitude on the part of employees? If so, briefly describe the circumstances and the cause of the ‘‘us versus them'' attitude. What could have been done (or could be done) to change the ‘‘us versus them'' attitude in your example?