Question

Case 3-4 Franklin Industries’ Whistleblowing (a GVV case)

Natalie got the call she had been waiting for over six long months. Her complaint to the human resources department of Franklin Industries had been dismissed. It was HR’s conclusion that she was not retaliated against for reporting an alleged embezzlement by the Accounting Department manager. In fact, HR ruled there was no embezzlement at all. Natalie had been demoted from assistant manager of the department to staff supervisor seven months ago after informing Stuart Masters, the controller, earlier in 2018 about the embezzlement. Her blood started to boil as she thought about all the pain and agony these past six months without any level of satisfaction for her troubles. Natalie Garson is a CPA who works for Franklin Industries, a publicly-owned company and manufacturer of trusses and other structural components for home builders throughout the U.S. Six months ago she filed a complaint with HR after discussing a sensitive matter with her best friend and co-worker, Roger Harris. Natalie trusted Harris, who had six years’ experience at Franklin. The essence of the discussion was that Natalie was informed by the accounting staff of what appeared to be unusual transactions between Denny King, the department manager, and an outside company no one had ever heard of before. The staff had uncovered over $5 million payments, authorized by King, to Vic Construction. No one could find any documentation about Vic so the staff dug deeper and discovered that the owner of Vic Construction was Victoria King. Further examination determined that Victoria King and Denny King were sisters. Once Natalie was convinced there was more to it than meets the eye, she informed the internal auditors who investigated and found that Vic Construction made a $5 million electronic transfer to a separate business owned by Denny King. One thing lead to another and it was determined by the internal auditors that King had funneled $5 million to Vic construction, which, at a later date, transferred the money back to King. It was a $5 million embezzlement from Franklin Industries. Natalie met with Roger Harris that night and told him about the HR decision that went against her. She was concerned whether the internal auditors would act now in light of that decision. She knew the culture at Franklin was “don’t rock the boat.” That didn’t matter to her. She was always true to her values and not afraid to act when a wrongdoing had occurred. She felt particularly motivated in this case – it was personal. She felt the need to be vindicated. She hoped Roger would be supportive. As it turned out, Roger cautioned Natalie about taking the matter any further. He had worked for Franklin a lot longer than Natalie and knew the board of directors consisted mostly of insider directors. The CEO of Franklin was also the chair of the board. It was well known in the company that whatever the CEO wanted to do, the board rubber-stamped it. Natalie left the meeting with Roger wondering whether she was on her own. She knew she had to act but didn’t know the best way to go about it. Even though Roger cautioned against going to the CEO or board, Natalie didn't dismiss that option.

Questions Assume you are in Natalie’s position. Answer the following questions.

1. What are the ethical values in this case? What about professional values?

2. Consider the following assuming you have decided to do something about the embezzlement:

a) What are the main arguments you are trying to counter. That is, what are the reasons and rationalizations you need to address?

c) What levers can you use to influence those who disagree with you?

d) What is your most powerful and persuasive response to the reasons and rationalizations you need to address? To whom should the argument be made? When and in what context?

3. Assume you have exhausted all your options within Franklin Industries. Is this a situation where you would consider filing a complaint with the SEC under the Sarbanes-Oxley Act? What about Dodd-Frank? Explain.

Answer 1

1.

A) in this case, N is appointed as CPA underlying F industries. She came across fraud transaction in the company and reported the issue to the Human resource department of the company. The issue reported by N turn out to be negative for her and she was demoted to the post of staff supervisor from CPA. N come across unusual payment amounting to $5 million with DK which was uncovered by the staff. The transaction was made by K to V construction owned by VK. It was further identified that VK and DK are siblings. The auditors that are internal to the company discovered that V construction transferred $5 million to the separate business owned by DK which is further transferred back to V construction.

In this case, the Key parties associated with the case are N, V construction, and DK and F industries. The company V construction was fake as there exist no documentation for its incorporation and it was only made to transfer funds from one account to another for personal advantages. The image of the company is at stake as it will be tarnished if the issue comes in limelight or it been caught by SEC or the concerned authority. The CEO who is also the board of director might have to face legal trial and heavy penalty for the alleged transaction.

C)In this case for influencing the key parties N is required to inform the issue to the higher authority or the top management of the company so that meaningful action can be taken in place for rectification of the embezzlement. The issue can also be reported to the internal auditor or the external auditor. However if no appropriate action is seen, then the issue can be reported to the SEC or the concerned authority so that all the accused pertaining to alleged transaction can be convicted and necessary action can be taken for securing the interest of the investor and stakeholders.

D) In this case, the argument is required to be made to the top management or the top official of the company. The argument is concerned with the embezzlement or the alleged transaction of $5 million which is already being reported by N to the human resource department. The reporting of the issue was done out of the business ethics and value that N assumed. In actual sense it must have been reported by the internal and external auditor at the time and place when such transaction was discovered so that necessary action would have been taken in place. The issue must have been reported to board of director or the top attorney in context to the alleged transaction of $5 million. Thus according to the business ethics, the company must have fair dealing in all its transaction which help keep the goodwill of the company, motivation and employees value intact.

3) The DF act was enacted for stating the weaknesses underlying the industry that deals with financial services which results in big firms such as BS and LB to collapse and become bankrupted. A whistle blower program is being developed by SEC underlying the DF act. According to this program if original information is being provided by informant voluntarily which lead to enforcement action by SEC. the informant is being awarded by SEC with 10 to 30% of the amount recovered by it. In order to qualify for the whistle blowing program, the informant is required to make sure that original information must be provided by him pertaining to the violation of the laws that were laid down by federal securities which leads to thriving enforcement action resulting in the monetary sanctions of more than one million dollars. The information provided must rely on the independent analysis or knowledge. The information provided by the informant should not exist already with the SEC. since the issue underlying this case revolves around the embezzlement of accounts pertaining to electronic transfer to V company headed by VK for an amount of $5 million which further transferred the money back to separate business which is headed by the king, hence, it can be concluded that the all the conditions for whistle blowing program are met as the transaction has violated the financial securities law and the amount of transaction is also more than $1 million.