The chief executive of a clothes manufacturer charged with committing financial fraud was dismayed that the controller and other employees had committed fraud. He said the company could have taken steps to improve the situation if senior management had known the poor financial results. Financial analysts who follow the company had noted, however, that the company had marked down its clothing line in sales to retail stores such as May Department Stores and Federated Department Stores. After the company cut prices 20 percent across the board, retail executives who were customers of the company wondered how the company could continue to be profitable. One analyst wondered how top management could not have known about the company’s financial difficulties in view of the 20 percent markdown.
For your information, top management is located in New York City, and the fraud occurred at the financial offices in Wilkes-Barre, Pennsylvania. The line of reporting is as follows: The controller reports to the chief financial officer, and the chief financial officer reports to the chief executive of the company. Both the controller and chief financial officer work in Wilkes-Barre. The chief financial officer reportedly has considerable autonomy. Write a short report indicating whether you think top management of the company is responsible for the fraud and state why (or why not).