Ethics Case 17–6 - VXI International - 401(k) plan contributions ● LO1
You are in your third year as internal auditor with VXI International,
manufacturer of parts and supplies for jet air- craft. 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:
1. What is Mr. Maxwell’s apparent motivation for the change in the way contributions are handled?
2. Do you perceive an ethical dilemma?
