1. What went wrong at Westchester? Summarize the case facts and key causes of the current situation. Your response should EXPLICITLY consider the COSO Framework.
Due to an informal corporate environment, Westchester Distributing, Inc. experienced a situation that could have been avoided had the control environment been in place. Carter Mario, a salesman for Westchester, defrauded his employer by falsifying expense reports and bribing a customer. George Pavlov, a sales manager, not only cooperated with Mario, but was also guilty of the same acts. After having a kickback deal with a customer go bad, Pavlov went to the VP of Administration, Joe Roberts, for help. Since Joe signs all neon signs out of inventory and because Mario had promised the customer three signs, they needed Joe to complete the transaction. Unfortunately, Joe tried to resolve the situation himself and went to the customer and offered him the signs. The customer, feeling as if the situation was inappropriate, had his attorney draw up a letter addressed to Elizabeth Jones, VP Finance, asking to be removed from the situation. At this point Jones and Patton, the two shareholders, meet to discuss how to move forward. The situation could easily turn volatile, landing Westchester in trouble with the California ABC accompanied by substantial fines and suspension of operations for 45 days. Exacerbating the problem, Mario, sent a formal letter to Patton trying to clear himself of any wrongdoing and placing the blame for his actions on the lack of control measures at Westchester. When comparing the Westchester control environment to the COSO reading, a clear separation between the two is obvious. The following is a list of the five framework components listed in the COSO reading accompanied by the action or lack-of-action by Westchester.
Control Environment: Westchester’s environment was informal, predominately leaving discretion up to the employees (the honor system)....
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