In the fourth year since the creation of the ESOP, the long-time CFO of Coffin Vaults suddenly dies of a heart attack. The CFO had been with the company for 40 years, and he had been instrumental in developing the terms of the sale of Coffin Vaults to the ESOP. When the CFO died, his estate had to surrender his share of stock in the ESOP for $10,000. The $10,000 was paid by the ESOP. Under the terms of the ESOP, only employees of Coffin Vaults could own shares in the ESOP. The ESOP bylaws set the $10,000 payment that would be paid to the estate of an employees should that employee die while employed by the ESOP. The 100 employees of Coffin Vault were each offered one share of stock for $10,000 when the ESOP was established. No employee could sell his/her share of stock until 2028, but employees who retired or left the company had to surrender their share of stock for $10,000. If an employee was terminated for cause, he/she was forced to surrender the share of stock without receiving any compensation. When a share of stock was returned to the ESOP, the share could be sold to a new employee for $10,000, but no employee could hold more than one share of the ESOP. The CEO hired a new CFO, who was a close personal friend from East High School. Roger Simpson, the new CFO, purchased one share of stock for $10,000. As part of his taking over the CFO position, Simpson reviewed the terms of the sale of Coffin Vaults to the ESOP. He noticed immediately that the ESOP would be required to pay George Coffin $5 million at the end of five years if company sales exceeded $16 million a year in 2028. No payment would be made to Coffin if sales in 2028 fell below $16 million. Based on sales projections for the coming two years (the fourth and fifth years since the ESOP was created), Simpson believed that Coffin would qualify for the $5 million payment. The ESOP had a sinking fund that should cover the payment to Coffin, but the ESOP would have to borrow funds to make the payment if the sinking fund did not have enough money in it to cover the $5 million. Simpson proposed a plan to Nielsen that would make it less likely that Coffin would receive the money. The ESOP booked sales when a vault was delivered to a cemetery or funeral establishment. Payment for the vault would come when the vault was sold to a family. Sometimes, payments for a vault would not be received by the ESOP for more than 6 months. As a result, accounts receivable was unusually high for a manufacturing company. If the ESOP changed its accounting procedures to book sales only when the cash was received, sales in the fifth year might fall below the $16 million. Also, the CFO proposed that the price of vaults not be raised in the fifth year as a further way to reduce the total sales figure. The method of recording sales is determined by the ESOP Board of Directors, and the CFO is usually instrumental in determining how sales are reported. Either method described above meets general accounting practice guidelines. Since the money in the sinking fund belongs to the stockholders in the ESOP, the board of directors, which is made up of company employees with no outside directors, could vote to split the sinking fund monies put aside for Coffin evenly among the employee shareholders if no $5 million payment were made to Coffin. Simpson wrote a confidential memo to Nielsen outlining the plan to keep sales below $16 million. Nielsen raised questions about the fairness of changing the way sales were reported just to make it unnecessary for the ESOP to pay the $5 million to Coffin. More than likely, the sinking fund would have the necessary funds in it to make the payment. Simpson argued that Coffin was fairly compensated for the company without paying out the $5 million. He said the employees at the company were the ones who deserved the money because they had worked without raises for the past 4 years and couldn't receive a raise until the sixth year of the ESOP. Simpson ignored the annual payment to employee/owners. Nielsen and Simpson decided to implement the change in reporting sales without getting the approval of the other members of the ESOP's Board of Directors. However, an employee in the accounting department noticed the change in how sales were reported, and he told George Coffin about the change and the impact the change might have on Coffin's expected $5 million payment. Coffin asked for a meeting with the Board of Directors and demanded to know why the accounting changes were made. He accused Nielsen and Simpson of ethical improprieties and criminal and civil fraud. He threatened to sue the ESOP if the changes in accounting practices were allowed to continue. And he demanded that Nielsen and Simpson be fired for unethical behavior.

1)You are a member of the Board of Directors. Would you vote to back Nielsen's and Simpson's decision?

2)Would you agree with George Coffin that changing the accounting practices amounted to fraud?

3Would you be upset that Nielsen and Simpson changed accounting practices without informing the board? Decide whether the actions of the two officers of the ESOP are legal and ethical.

4)Do you believe that Nielsen and Simpson should be fired? How would you react to the possibility that you and other employees might get to split the $5 million that was earmarked for Coffin? Defend your explanation.

Answer rating: 100% (QA)

1 As a member of the Board of Directors I would not support Nielsens and Simpsons decision Changing ... View the full answer