Question

You are in your third year as internal auditor with VXI International, manufacturer of parts and...

You are in your third year as internal auditor with VXI International, manufacturer of parts and supplies for jet aircraft. VXI began a defined contribution pension plan three years ago. The plan is a so-called 401(k) plan (named after the Tax Code section that specifies the conditions for the favorable tax treatment of these plans) that permits voluntary contributions by employees. Employees’ contributions are matched with one dollar of employer contribution for every two dollars of employee contribution. Approximately $500,000 of contributions is deducted from employee paychecks each month for investment in one of three employer-sponsored mutual funds. While performing some preliminary audit tests, you happen to notice that employee contributions to these plans usually do not show up on mutual fund statements for up to two months following the end of pay periods from which the deductions are drawn. On further investigation, you discover that when the plan was first begun, contributions were invested within one week of receipt of the funds. When you question the firm’s investment manager about the apparent change in the timing of investments, you are told, “Last year Mr. Maxwell (the CFO) directed me to initially deposit the contributions in the corporate investment account. At the close of each quarter, we add the employer matching contribution and deposit the combined amount in specific employee mutual funds.”

Required:

What is Mr. Maxwell’s apparent motivation for the change in the way contributions are handled?

Do you perceive an ethical dilemma?

Homework Answers

Answer #1

Requirement 1

His superficial enthusiasm is winning benefit of the employee’s contributions. The company is considered having more funds than they ought to since some of the funds are the employee’s contributions, accompanied by the company’s contribution (1 dollar for every 2 dollars the employee contributes) to the employees mutual funds account.

Requirement 2

I do see an moral predicament because they are putting employee’s money into the corporate investment account. The employees are not financing into the company so their money should be taken from their paychecks and deposited into their mutual funds account. The company first started doing this until last year when they decided to hold the employees contributions. With holding the contributions the company could be earning interest off of everyone’s funds while they are being held in the corporate investment.

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