Do you think what Shane did was whistleblowing? Explain what is meant by whistleblowing?

Complete Case 3-5: Walmart Inventory Shrinkage.
Read the case and write a 5-7 page executive summary on the case, including answers to the following questions.

What are the ethical issues in this case, and who is being affected?
What would you do in this situation?
Do you think what Shane did was whistleblowing? Explain what is meant by whistleblowing?
When answering the three questions above, consider the questions that are presented in the case and use those to frame your responses.

Case 3-5 Walmart Inventory Shrinkage (a GVV Case)

The nations retailers lost a staggering amount of money in 2016 due to shoplifting, organized crime, internal theft, and other types of inventory shrink.

Inventory shrink totaled $48.9 billion in 2016, up from $45.2 billion the year before, as budget constraints left retail security budgets flat or declining, according to the annual National Retail Security Survey by the National Retail Federation and the University of Florida. The thefts amounted to 1.44% of sales, up from 1.38%.

According to the study,1 which was sponsored by The Retail Equation, 48.8% of retailers surveyed reported increases in inventory shrink, and 16.7% said it remained flat. Shoplifting and organized retail crime accounted for 36.5% of shrink, followed by employee theft/internal (30%), administrative paperwork error (21.3%), and vendor fraud or error (5.4%).

Shoplifting continued to account for the greatest losses of overall shrink. Shoplifting averaged $798.48 per incident, up from $377 in 2015. The rise was partially attributed to retailers allocating smaller budgets for loss prevention, leaving them with fewer security staff to fight theft, the report said.

The average loss due to employee theft per incident was put at $1,922.80, up from $1,233.77 in 2015. The average cost of retail robberies dropped to $5,309.72 from $8,170.17 in 2015, but remained at more than double the $2,464.50 seen in 2014.

For the first time in the survey, retailers were asked about return fraud, reporting an average loss of $1,766.27.

The facts of this case are from the Walmart shrinkage fraud discussed in an article in The Nation on June 11, 2014. Literary license has been exercised for the purpose of emphasizing important issues related to organizational ethics at Walmart. Any resemblance to actual people and events is coincidental.2

Shane OHara always tried to do the right thing. He was in touch with his values and always tried to act in accordance with them, even when the going got tough. But nothing prepared him for the ordeal he would face as a Walmart veteran and the new store manager in Atomic City, Idaho.

In 2013, Shane was contacted by Jeffrey Cook, the regional manager, and told he was being transferred to the Atomic City store in order to reduce the troubled stores high rate of shrinkage (i.e., theft including shoplifting and employees stealing) to levels deemed acceptable by the companys senior managers for the region. As a result of fierce competition, profit margins in retail can be razor thin, making shrinkage a potentsometimes criticalfactor in profitability. Historically, Walmart had a relatively low rate of about 0.8% of sales. The industry average was 1%.

Prior to his arrival at the Atomic City store, Shane had heard the store had shrinkage losses as high as $2 million or morea sizable hit to its bottom line. There had even been talk of closing the store altogether. He knew the pressure was on to keep the store open, save the jobs of 40 people, and cut losses so that the regional manager could earn a bonus. It didnt hurt that he would qualify for a bonus as well, so long as the shrinkage rate was cut by more than two-thirds.

Shane did what he could to tighten systems and controls. He managed to convince Cook to hire an asset-protection manager for the store. The asset-protection program handles shrink, safety, and security at each of its stores. The program worked. Not only did shrinkage decline but other forms of loss, including changing price tags on items of clothing, were significantly reduced.

However, it didnt seem to be enough to satisfy Cook and top management. During the last days of August 2013, Shanes annual inventory audit showed a massive reduction in the stores shrinkage rate that surprised even him: down to less than $80,000 from roughly $800,000 the previous year. He had no explanation for it, but was sure the numbers had been doctored in some way.

During the remainder of 2013, a number of high-level managers departed from the company. Cindy Rondel, the head of Walmarts Idaho operations, retired; so did her superior, Larry Brooks. Walmarts regional asset-protection manager for Idaho, who was intimately involved with inventory tracking in the state, was fired as well. Shane wondered if he was next.

Shane decided to contact Cook to discuss his concerns. Cook explained why the shrinkage rate had shrunk so much by passing it off as improper accounting at the Atomic City store that had been corrected. He told Shane that an investigation would begin immediately and he was suspended with pay until it was completed. Shane was in shock. He knew the allegations werent true. He sensed he might become the fall guy for the fraud.

Shane managed to discretely talk about his situation with another store manager in the Atomic City area. That manager said she had been the target of a similar investigation the year before. In her case, she had discovered how the fraud was carried out and the numbers were doctored, but she had told no oneuntil now.

She explained to Shane that the fraud involved simply declaring that missing items were not, in fact, missing. She went on to say you could count clothing items in the store and if the on-hand count was offas in, you were supposed to have 12 but you only had 10you could explain that the other 2 were in a bin where clothing had been tried on by customers, not bought, and left in the dressing room, often with creases that had to be cleaned before re-tagging the clothing for sale. So, even though some items may have been stolen, they were still counted as part of inventory. There was little or no shrinkage to account for.

At this point Shane did not know what his next step should be. He needed to protect his good name and reputation. But what steps should he take? That was the question.

Questions
Assume you are in Shane OHaras position. Answer the following questions.

Put on Your Thinking Cap and explain how the provisions of the Sarbanes-Oxley Act might have helped to detect the fraud.

What anti-fraud controls might have helped detect the fraud. Why?

Assume you are in Shane OHaras position. What would you do next and why? Consider the following in crafting your response.

Who are the stakeholders in this case and what are the ethical issues?

What do you need to say, to whom, and in what sequence?

What are the reasons and rationalizations you are likely to hear in getting your point across?

What is your most powerful and persuasive response to these arguments? To whom should you make them? When and in what context?

Is this a situation where you would seriously consider blowing the whistle since you were suspended with pay? Under what conditions would you blow the whistle and what process might you follow?

Case 3-6 Full Disclosure: The Case of the Morally Challenged AP Clerk (a GVV case)

John Stanton, CPA, is a seasoned accountant who left his Big-4 CPA firm Senior Manager position to become the CFO of a highly successful hundred million-dollar privately held manufacturer of solar panels. The company wanted Johns expertise in the renewable energy sector and his pedigree from working for one of the Big-4 firms. The company plans to go public later this year and wants John to lead the effort. Everything went well for the first two months until the controller, Diane Hopkins, who is also a CPA, came to John with a problem. She discovered that one of her accounts payable clerks has been embezzling money from the company by processing and approving fictitious invoices from shell companies for fictitious purchases that the AP clerk had created. Diane estimated that the clerk had been able to steal approximately $250,000 over the year and a half they worked at the company. Diane and John agreed to fire the clerk immediately and did so. They also agreed that John would report the matter to the police.

page 195

John picked up the phone and called the CEO, David Laskey, who was also the majority shareholder, to give him a heads up on what had transpired. Laskey asked John to come to his office the next day to discuss the need to report the matter to the police. Laskey shared with John that he did not think it was a good idea to report it to the police as he was fearful of the effect on taking the company public and the initial public offering share price.

After the call, John reflected on what it would mean to not report the matter to the police and whether there were others he needed to inform about the matter.

Questions
To whom do John Stanton and David Laskey owe their ultimate responsibility? Explain.

If Stanton were to agree not to report this embezzlement to the police or disclose it in the annual report and prospectus, would he be violating the integrity or due care rule in the AICPA Code of Professional Conduct? What about acts discreditable?

Assume Stanton is preparing for the meeting with Laskey. Consider the following in deciding what he should do.

What can he say to Laskey to counteract the reasons Laskey provided not to notify the police?

Who can Stanton rely on for support in this matter? What might he say to that person(s) to encourage their support?

What levers can Stanton use to convince Laskey as to the correct course of action given the companys impending IPO?

What should Stanton do next if Laskey orders him to drop the matter?

name of book is Ethical Obligations and Decision-Making in Accounting: Text and Cases by Steven Mintz, 2020

Last Completed Projects