Harvard Case - Freeze (A): Handling A Whistle-Blowing Report
"Freeze (A): Handling A Whistle-Blowing Report" Harvard business case study is written by Paulina Arroyo, Vicky Poirier, Myriam Levesque, Nadia Smaili. It deals with the challenges in the field of Accounting. The case study is 3 page(s) long and it was first published on : Dec 18, 2023
At Fern Fort University, we recommend a comprehensive and transparent approach to address the whistleblower report, prioritizing ethical conduct and compliance with relevant accounting standards. This involves an immediate and thorough investigation, clear communication with stakeholders, and potential implementation of corrective actions.
2. Background
This case study revolves around Fern Fort University, a private institution facing a whistleblower report alleging accounting irregularities in its financial statements. The report claims that the university is manipulating its financial performance by misclassifying expenses and understating liabilities. The whistleblower, a former employee, has provided specific examples and documentation to support their claims. The university's board of trustees and senior management are now tasked with addressing this serious allegation.
The main protagonists in this case are:
- The Whistleblower: A former employee of Fern Fort University who has brought forward concerns about potential accounting irregularities.
- The Board of Trustees: The governing body responsible for overseeing the university's operations and financial health.
- Senior Management: The university's executive team responsible for managing day-to-day operations and financial reporting.
3. Analysis of the Case Study
This case study presents a complex ethical and financial dilemma for Fern Fort University. The potential for accounting irregularities raises serious concerns about the university's financial transparency, accountability, and compliance with relevant accounting standards.
To analyze this situation, we can apply the following frameworks:
a) Corporate Governance Framework: This framework emphasizes the importance of ethical behavior, transparency, and accountability within organizations. The whistleblower report highlights potential failures in the university's corporate governance system, particularly in the areas of internal controls and financial reporting.
b) Financial Reporting Framework: The case study raises questions about the university's compliance with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), depending on the applicable jurisdiction. The alleged misclassification of expenses and understating of liabilities could lead to inaccurate financial statements, misleading investors, and potentially impacting the university's creditworthiness and reputation.
c) Risk Management Framework: The whistleblower report highlights the importance of a robust risk management system within Fern Fort University. The university needs to identify, assess, and mitigate risks related to financial reporting, internal controls, and ethical conduct.
4. Recommendations
Immediate Actions:
- Launch a Thorough Investigation: The university should immediately initiate a comprehensive and independent investigation into the allegations. This investigation should be conducted by a qualified external party with expertise in accounting and forensic auditing.
- Communicate with Stakeholders: The university should promptly inform its stakeholders, including the board of trustees, senior management, faculty, staff, students, donors, and accrediting bodies, about the whistleblower report and the ongoing investigation. Transparency and open communication are crucial to maintaining trust and credibility.
- Protect the Whistleblower: The university must ensure the whistleblower's safety and anonymity, protecting them from retaliation or harassment.
Long-Term Actions:
- Strengthen Internal Controls: The university should review and strengthen its internal controls over financial reporting. This includes implementing robust procedures for expense classification, liability recognition, and financial statement preparation.
- Enhance Ethical Culture: The university should foster a culture of ethical conduct and compliance. This involves developing a strong code of ethics, providing ethics training to all employees, and establishing a clear process for reporting concerns.
- Implement Whistleblower Protection Program: The university should establish a formal whistleblower protection program that encourages employees to report concerns without fear of retaliation.
- Review Accounting Procedures and Policies: The university should review its accounting procedures and policies to ensure they are aligned with relevant accounting standards and best practices. This includes examining the university's cost accounting system, asset management practices, and budgeting processes.
- Enhance Financial Reporting Transparency: The university should improve the transparency of its financial reporting. This includes providing detailed information about its financial performance, accounting policies, and risk management practices.
- Strengthen Corporate Governance: The university should strengthen its corporate governance framework by enhancing the role of the board of trustees, establishing independent audit committees, and promoting diversity within leadership positions.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations align with Fern Fort University's mission to promote ethical conduct, academic excellence, and financial responsibility.
- External Customers and Internal Clients: The recommendations aim to protect the interests of all stakeholders, including students, faculty, staff, donors, and the broader community.
- Competitors: By addressing the whistleblower report and strengthening its financial reporting practices, Fern Fort University can maintain its competitive edge in the higher education sector.
- Attractiveness: Implementing these recommendations will enhance the university's financial transparency, accountability, and credibility, making it more attractive to potential students, donors, and investors.
6. Conclusion
The whistleblower report presents a critical opportunity for Fern Fort University to demonstrate its commitment to ethical conduct, financial transparency, and compliance with relevant accounting standards. By taking immediate and decisive action to investigate the allegations, communicate with stakeholders, and implement corrective measures, the university can restore trust, maintain its reputation, and ensure its long-term financial stability.
7. Discussion
Alternatives:
- Ignoring the Whistleblower Report: This option would be highly unethical and could lead to further legal and reputational damage.
- Conducting an Internal Investigation Only: This approach might not be sufficient to address the seriousness of the allegations and could raise concerns about bias or lack of independence.
Risks and Key Assumptions:
- Risk of Legal Action: The university faces the risk of legal action from the whistleblower, investors, or regulatory bodies if the allegations are substantiated.
- Reputational Damage: The university's reputation could be severely damaged if the allegations are proven true.
- Loss of Trust: The university could lose the trust of its stakeholders, including students, donors, and faculty.
Assumptions:
- The whistleblower's allegations are credible and warrant a thorough investigation.
- The university is committed to ethical conduct and financial transparency.
- The university has the resources and expertise to conduct a comprehensive investigation and implement corrective measures.
8. Next Steps
The university should establish a timeline for implementing the recommendations, with key milestones including:
- Week 1: Initiate the external investigation and communicate with stakeholders.
- Month 1: Complete the initial phase of the investigation and provide an update to stakeholders.
- Month 3: Finalize the investigation report and implement corrective actions.
- Month 6: Review and enhance internal controls, accounting procedures, and corporate governance practices.
- Year 1: Implement a whistleblower protection program and conduct ongoing monitoring and evaluation of the university's financial reporting processes.
By taking these steps, Fern Fort University can address the whistleblower report effectively, restore trust, and demonstrate its commitment to ethical conduct and financial integrity.
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Case Description
On May 5, 2023, Vicky Poirier received a call from Daniel Chen, vice-president of finance at Freeze Inc. After receiving an internal tip, Chen was calling to ask her to investigate a potential case of collusion involving one of his colleagues. As president of Quantum Juricomptable Inc. (Quantum), Poirier had to discuss the issues and challenges of this potential mandate with her team before deciding whether to accept it. Quantum's investigation team, including forensic accountants, planned and performed an investigation to verify whether these allegations were true and prepared a forensic accounting report for a special committee at Freeze. The consequences of this report would be significant for the organization. How should the Freeze react to the report's findings? What were the issues and challenges underlying any decision to dismiss the wrongdoers? Should Freeze dismiss them? This case extends into a supplementary B-case, which introduces a new decision point (see product W33372).
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