The CEO and the CFO of Automation Company were both aware that the company’s controller was reporting fraudulent revenues. Upper level executives are paid very large bonuses when the company meets the earnings goals established in the company’s budgets. While the CEO had pushed the CFO and controller to “make the numbers,” he had not told him to “make up the numbers.” Besides, he could plead ignorance if the fraud was ever discovered. The CFO knew he should prohibit the fraudulent reporting but also knew the importance of making the numbers established in the budget. He told himself that it wasn’t just for his bonus but for the stockholders as well. If the actual earnings were below the budgeted target numbers, the stock price would drop and the shareholders would suffer. Besides, he believed that the actual revenues would increase dramatically in the near future and they could cover for the fraudulent revenue by underreporting these future revenues. He concluded that no one would get hurt and everything would be straightened out in the near future.

Required

a. Explain why the internal control practice of separation of duties failed to prevent the fraudulent reporting.

b. Identify and discuss the elements of the fraud triangle that motivated the fraud.

c. Explain how the provisions of the Sarbanes-Oxley Act would serve to deter this type of fraudulent reporting.

d. Review the statement of ethical professional practice shown in Exhibit 1.15. Identify and comment on which of the ethical principles were violated by the CFO.