RAS, Inc., is a supplier of residence alarm systems to building contractors. Sam Jennings, the company’s new CEO, is out to make a name for himself and makes it known to his management team that he plans for the company to meet, if not exceed, its sales target each quarter.

Sam begins to realize that the company is falling short of its goal and he quickly calls a management meeting to announce his new plan. He says he has arranged sweet deals with several of the company’s largest customers. RAS will pay the contractors a 1% fee to buy a large quantity of alarm systems just before the end of each quarter, with the understanding that RAS will buy the alarm systems back shortly after the beginning of the next quarter. Sam uses the term “buy” loosely since there is no plan for an exchange of cash. RAS will record the sales transactions by debiting Accounts Receivable, crediting Sales Revenue, debiting Cost of Goods Sold, and crediting Inventory. When the alarm systems are bought back, RAS will debit Inventory and credit Accounts Receivable, which, of course, will have no impact on the income statement.

Lisa Barlow, the company’s accountant, tells Sam that there is a problem with his plan. She explains that under Generally Accepted Accounting Principles (GAAP), RAS has not earned revenue until inventory is delivered to customers. Sam quickly responds that he has everything under control. He explains to Lisa that the contractors have agreed to accept automatic shipments of the alarm systems and carry them in the company’s inventory as of quarter-end. Sam says this is a “win-win” situation for everyone.

The plan did exactly what Sam hoped it would do. The company reported sales that consistently exceeded expectations. These inflated sales figures helped to boost the company’s stock price to an all-time high. Sam considered himself a true winner. His compensation package included a lucrative stock bonus plan tied to the company’s sales growth. As a result of the company’s reported sales revenue, Sam received stock in the company that he was able to sell for thousands of dollars at the inflated stock price.

Requirements

1. Is there any evidence of unethical behavior in this case? Explain your answer.

2. Other than Sam and the contractors, who could be harmed by Sam’s plan?