The chief executive of a clothes manufacturer charged with committing financial

Question

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).

Explanation / Answer

Fraud is a willful act that tries to seek unfair advantage. In the present case definitely the top management is to be held responsible for the fraud being taken place. The cheif fianncial officer is concerned with the managememt of fianncial risks and the Chief executive officer is the the one incharge of the total management. In the given case the CEO is not present at the place where the fraud took place. However this cannot be a valid reason for him to escape saying that the top management is unaware of the same. CEO is the top ranked official in an organisation. He is laid down with the decison making functions and also with responsibility to make sure that the impact of his decisions is as expected and not adverse. He has to take reasonable care before making any decision and coming to any conclusion. In the present case , 20% markdown is not a minor issue for the top management to not consider. It is an important event, the implications of which are to be taken care of by the top management. The top management cannot stay aloof from all the happenings by passing on the blame to the other employees. The chief financial officer having the autonomy is another issue to be considered here. However this in no way shall lessen the responsibilities of the top management. Hence, the top management of teh company is responsible for the fraud.

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