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Read the case Walmart Inventory Shrinkage (a GVV case) below and write a 5-7 page executive summary on the case, including answers to the following questions.

  1. What are the ethical issues in this case, and who is being affected?
  2. What would you do in this situation?
  3. Do you think what Shane did was whistleblowing? Explain what is meant by whistleblowing?

When answering the three questions above, consider the questions that are presented in the case and use those to frame your responses.  

Case study write-ups follow proper APA formatting and integrate Chapter 3: Organization Ethics and Corporate Governance (attached).  Well written, proper grammar, and follow APA guidelines including references and in-text citations when needed.

The nation’s retailers lost a staggering amount of money in 2016 due to shoplifting, organized crime, internal theft, and other types of inventory shrink.

Inventory shrink totaled $48.9 billion in 2016, up from $45.2 billion the year before, as budget constraints left retail security budgets flat or declining, according to the annual National Retail Security Survey by the National Retail Federation and the University of Florida. The thefts amounted to 1.44% of sales, up from 1.38%.

According to the study,1 which was sponsored by The Retail Equation, 48.8% of retailers surveyed reported increases in inventory shrink, and 16.7% said it remained flat. Shoplifting and organized retail crime accounted for 36.5% of shrink, followed by employee theft/internal (30%), administrative paperwork error (21.3%), and vendor fraud or error (5.4%).

Shoplifting continued to account for the greatest losses of overall shrink. Shoplifting averaged $798.48 per incident, up from $377 in 2015. The rise was partially attributed to retailers allocating smaller budgets for loss prevention, leaving them with fewer security staff to fight theft, the report said.

The average loss due to employee theft per incident was put at $1,922.80, up from $1,233.77 in 2015. The average cost of retail robberies dropped to $5,309.72 from $8,170.17 in 2015, but remained at more than double the $2,464.50 seen in 2014.

For the first time in the survey, retailers were asked about return fraud, reporting an average loss of $1,766.27.

The facts of this case are from the Walmart shrinkage fraud discussed in an article in The Nation on June 11, 2014. “Literary license” has been exercised for the purpose of emphasizing important issues related to organizational ethics at Walmart. Any resemblance to actual people and events is coincidental.2

Shane O’Hara always tried to do the right thing. He was in touch with his values and always tried to act in accordance with them, even when the going got tough. But nothing prepared him for the ordeal he would face as a Walmart veteran and the new store manager in Atomic City, Idaho.

In 2013, Shane was contacted by Jeffrey Cook, the regional manager, and told he was being transferred to the Atomic City store in order to reduce the troubled store’s high rate of “shrinkage” (i.e., theft including shoplifting and employees stealing) to levels deemed acceptable by the company’s senior managers for the region. As a result of fierce competition, profit margins in retail can be razor thin, making shrinkage a potent—sometimes critical—factor in profitability. Historically, Walmart had a relatively low rate of about 0.8% of sales. The industry average was 1%.

Prior to his arrival at the Atomic City store, Shane had heard the store had shrinkage losses as high as $2 million or more—a sizable hit to its bottom line. There had even been talk of closing the store altogether. He knew the pressure was on to keep the store open, save the jobs of 40 people, and cut losses so that the regional manager could earn a bonus. It didn’t hurt that he would qualify for a bonus as well, so long as the shrinkage rate was cut by more than two-thirds.

Shane did what he could to tighten systems and controls. He managed to convince Cook to hire an “asset-protection manager” for the store. The asset-protection program handles shrink, safety, and security at each of its stores. The program worked. Not only did shrinkage decline but other forms of loss, including changing price tags on items of clothing, were significantly reduced.

However, it didn’t seem to be enough to satisfy Cook and top management. During the last days of August 2013, Shane’s annual inventory audit showed a massive reduction in the store’s shrinkage rate that surprised even him: down to less than $80,000 from roughly $800,000 the previous year. He had no explanation for it, but was sure the numbers had been doctored in some way.

During the remainder of 2013, a number of high-level managers departed from the company. Cindy Rondel, the head of Walmart’s Idaho operations, retired; so did her superior, Larry Brooks. Walmart’s regional asset-protection manager for Idaho, who was intimately involved with inventory tracking in the state, was fired as well. Shane wondered if he was next.

Shane decided to contact Cook to discuss his concerns. Cook explained why the shrinkage rate had shrunk so much by passing it off as improper accounting at the Atomic City store that had been corrected. He told Shane that an investigation would begin immediately and he was suspended with pay until it was completed. Shane was in shock. He knew the allegations weren’t true. He sensed he might become the fall guy for the fraud.

Shane managed to discretely talk about his situation with another store manager in the Atomic City area. That manager said she had been the target of a similar investigation the year before. In her case, she had discovered how the fraud was carried out and the numbers were doctored, but she had told no one—until now.

She explained to Shane that the fraud involved simply declaring that missing items were not, in fact, missing. She went on to say you could count clothing items in the store and if the on-hand count was off—as in, you were supposed to have 12 but you only had 10—you could explain that the other 2 were in a bin where clothing had been tried on by customers, not bought, and left in the dressing room, often with creases that had to be cleaned before re-tagging the clothing for sale. So, even though some items may have been stolen, they were still counted as part of inventory. There was little or no shrinkage to account for.

At this point Shane did not know what his next step should be. He needed to protect his good name and reputation. But what steps should he take? That was the question.

Questions

Assume you are in Shane O’Hara’s position. Answer the following questions.

Put on “Your Thinking Cap” and explain how the provisions of the Sarbanes-Oxley Act might have helped to detect the fraud.

What anti-fraud controls might have helped detect the fraud. Why?

Assume you are in Shane O’Hara’s position. What would you do next and why? Consider the following in crafting your response.

Who are the stakeholders in this case and what are the ethical issues?

What do you need to say, to whom, and in what sequence?

What are the reasons and rationalizations you are likely to hear in getting your point across?

What is your most powerful and persuasive response to these arguments? To whom should you make them? When and in what context?

Is this a situation where you would seriously consider blowing the whistle since you were suspended with pay? Under what conditions would you blow the whistle and what process might you follow?

Pressure to reduce inventory shrinkage at a Walmart store amidst alleged accounting improprieties and related efforts of the protagonist to voice values.

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Organizational Ethics and
Corporate Governance

Chapter 3

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Organizational Ethics and Ethical Climate

• Organizational ethics
• Sound moral principles

• Organizational ethical climate
• Moral atmosphere
• Level of ethics practiced within a company
• Determined by leaders

• Critical component
• Shared Values, Beliefs, Goals, and Problem-

solving Mechanisms
• Focuses on issues of right and wrong

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Ethical Leadership

• Leaders of Good Character
• Possess integrity, courage, and compassion
• Careful and prudent
• Decisions and actions inspire employees to act in an

enhancing way

• Virtues
• Courage, temperance, wisdom, justice, optimism,

integrity, humility, reverence and compassion

• Role Models

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Key Markers of Highly Ethical Organizations

• Humility
• Zero tolerance for individual and collective destructive

behaviors
• Justice
• Integrity
• Trust
• A focus on process
• Structural reinforcement
• Social responsibility
• Values-driven organization that encourages openness,

transparency, and provides supportive environment to voice
values without fear of retribution or retaliation

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Framework for Understanding Ethical
Decision Making in Business

• Ethical Issue Intensity
• Importance of the issue to the individual, work group and/or

organization (intensity) based on values, beliefs and norms involved
and pressures in the workplace.

• Individual Factors
• Values of individuals
• Organizational and social forces shape behavioral intentions and

decision making
• Organizational Factors

• Organization’s values have a greater influence than a person’s own
values.

• Opportunity
• Conditions that limit or permit ethical or unethical behavior

• Business Ethics Intentions, Behavior, and Evaluations
• Organizational ethical culture is shaped by effective leadership

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Organizational Influence on Ethical Decision
Making

• The Jones-Hiltebeitel model looks at the role of
one’s personal code of conduct in ethical
behavior within an organization

• Moral intensity

• When one’s personal code is insufficient to
make the necessary moral decision, the
individual will look at professional and
organizational influences to resolve the conflict

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Ethical Dissonance Model

• Interaction between the individual and the
organization, based upon person-organization
ethical fit at various stages of the contractual
relationship in each potential ethical fit scenario

• Four potential fit options:
1. High-High (high organization & high individual ethics)
2. Low-Low (low organization & low individual ethics)
3. High-Low (high organization & low individual ethics)
4. Low-High (low organization & high individual ethics)

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Seven Signs of Ethical Collapse

“Occurs when any organization has drifted from the
basic principles of right and wrong” Marianne
Jennings

1. Pressure to maintain numbers
2. Fear and silence
3. Young ‘uns and bigger than life CEO
4. Weak board of directors
5. Conflicts of interests overlooked or unaddressed
6. Innovation like no other company
7. Goodness in some areas atones for evil in others

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Pressure to Maintain Numbers and Fear of
Reprisals

• Ethical collapse occurs when there is an
unreasonable and unrealistic obsession with
meeting quantitative goals

• “financial results at all costs”

• Employees are reluctant to raise issues of ethical
concern because they may be ignored, treated
badly, transferred or worse

• “kill the messenger syndrome”

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Loyalty to the Boss and Weak Board of
Directors

• Young people selected by the CEO for their
position based on inexperience, possible
conflicts of interest, and unlikelihood to
question the boss’ decisions

• Weak board of directors characterizes virtually
all of the companies with major accounting
frauds in the early part of the 2000s

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Stakeholder Orientation

• Business Stakeholders
• Investors and shareholders, creditors, employees,

customers, suppliers, government agencies, communities
and others

• Have a “stake” or a claim in some aspect of a company’s
products, operations, markets, industry and outcome

• Stakeholder orientation is the degree to which an
organization understands and addresses stakeholder
demands. Consists of

• Generation of data about stakeholder groups and
assessment of the firm’s effects on these groups

• Distribution of this information throughout the firms
• The responsiveness of the organization as a whole to this

information

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The Ford Pinto Case

• Subcompact car
• Unsafe gas tanks could burst into flames
• Initial ethical legalism defense
• Risk/cost benefit analysis
• Too costly to replace the fuel tanks
• Compliance with law versus ethical behavior – met

all safety requirements
• Utilitarian reasoning

• Focusing on costs and benefits
• Ignores rights of various stakeholders
• Ignored cost of potential lawsuits

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Establishing an Ethical Culture

• Corporate culture is the shared beliefs of top managers
in a company about how they should manage
themselves and other employees, and how they should
conduct their business (es).

• Tone at the top refers to the ethical environment that is
created in the workplace by the organization’s
leadership.

• Corporate culture starts with an explicit statement of
values, beliefs, and customs from top management.

• A code of ethics serves as a guide to support ethical
decision making.

• It clarifies an organization’s mission, values, and principles,
linking them with standards of professional conduct.

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Trust in Business

• Trust means to be reliable and carry through words
with deeds.

• Trust becomes pervasive only if the organization’s
values are followed and supported by top
management.

• Trust can be lost, even if once gained in the eyes of
the public, if an organization no longer follows the
guiding principles that helped to create its
reputation for trust.

• Credo is an aspirational statement that encourages
employees to internalize the values of the company.

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Johnson & Johnson:
A Case of Dr. Jekyll and Mr. Hyde?

• J&J’s credo emphasizes primary obligation to those who use
and rely on the safety of its products

• Tylenol Poisoning – J&J put customer safety first
• J&J has been withdrawing from its “trust” bank in recent

years
• Illegally promoted the antipsychotic Risperdal
• Misleading statements about the recall of Motrin
• Included methylene chloride, which is banned by the FDA, in their

baby shampoo
• DePuy Orthopaedics sold metal-on-metal hip implants that were

found to shed minute particles into a patient’s bloodstream over
time

• Ethicon vaginal mesh did not meet reasonable safety standards
• Takes a long time to build a reputation of trust, but not very

long at all to tear it down.

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Ethics in the Workplace

• A code of conduct goes beyond what is legal for an organization and
provides normative guidelines for ethical conduct. Support for ethical
behavior from top management is a critical component of fostering an
ethical climate.

• Measures that should be taken to establish an ethical culture:
• Clear policies on ethical conduct including a code of ethics
• Ethics training program that instills a commitment to act ethically and explains

the code provisions
• A top level officer (Chief Ethics and Compliance Officer) to oversee ethics and

compliance
• Use internal auditors to investigate whether ethics policies are followed
• Strong internal controls to prevent and detect unethical behaviors
• Whistleblowing policies, including reporting outlets
• Ethics hot line for anonymous tips
• Ethics statement signed by employees
• Enforce ethics policies fairly and take immediate action against violators
• Reward ethical behavior and include in performance evaluation system

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Character and Leadership in the Workplace

• Characteristics of ethical behavior in leaders
include:

• “Managers are people who do things right and
leaders are people who do the right thing.”
Warren Bennis

• Rules for managers to set ethical tone at the
top:

• Consider how your actions affect others.
• Do no harm.
• Make decisions that are universal.
• Reflect before deciding.

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KPMG’s Integrity Survey 2013

• People of integrity are self-driven to do the right thing.
• KPMG’s Integrity Survey 2013 surveyed more than 3,500 U.S.

workers
• Nearly 75% of employees observed misconduct within past 12 months
• More than 50% of employees reported what they observed could cause a

significant loss of public trust if discovered
• Causes: Pressure to do “whatever it takes” to meet targets, not taking

code of conduct seriously, fear of losing one’s job for not meeting targets,
rewarding employees for results and not the means used to achieve them

• When employees were asked what they would do on observing a
violation of code of conduct,

• 78% would notify their supervisor or another manger
• 54% would try resolving the matter directly
• 53% would call the ethics or compliance hotline
• 26% would notify someone outside the organization
• 23% would look the other way or do nothing

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2013 National Business Ethics Survey

• Views of Employees from 2011-2013:
• Observed misconduct have declined between 2011 and 2013.
• Pressure to compromise ethical standards declined but

retaliation against whistleblowers increased; increase in ethics
training programs and the use of ethical conduct in employees
evaluations.

• Six most observed types of misconduct: (1)stealing or
theft, (2)falsifying time reports, (3) falsifying expense
reports, (4)falsifying and manipulating financial
reporting information, (5)falsifying invoices, books, and
records, and (6) accepting gifts or kickbacks.

• Concern that while misconduct is down overall, a
relatively high percentage of misconduct is committed
by managers.

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ACFE 2014 Report to the Nation
Occupational Fraud

• Fraud can be defined as a deliberate
misrepresentation to gain advantage over
another party

• Typical business loses 5% of annual revenues to
fraud; median loss of $145,000

• Occupational fraud is use of one’s position
within organization to misappropriate
organization’s resources or assets for personal
gain

• Frauds lasted a median of 18 months before
detection

• More likely to be detected by tip, using hotlines,
than any other way

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ACFE 2014 Report to the Nation
Occupational Fraud

Frequency of Anti-Fraud Controls
• External audit of financial statements – 81.4%
• Code of conduct – 77.4%
• Internal audit department – 70.8%
• Management certification of financial statements –

70.0%
• External audit of internal controls – 65.2%
• Management review – 62.6%
• Independent audit committee – 62.0%

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Behavioral Indicators of Fraud

• Living Beyond Means
• Financial Difficulties
• Unusual Close Association with Vendor/Client
• Control Issues, Unwillingness to Share Duties
• Wheeler-Dealer Attitudes
• Divorce/Family Issues
• Instability, Suspiciousness or Defensiveness
• Addiction Problems
• Complained about Inadequate Pay
• Refusal to Take Vacations

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Internal Control Weaknesses

• Internal control includes all of the processes and
procedures that management puts in place to help make
sure that its assets are protected and that company
activities are conducted in accordance with the
organization’s policies and procedures.

• An effective system of internal controls is critical to
establish an ethical corporate culture that should be
supported by the tone at the top.

• An internal control system, no matter how well
conceived and operated, can provide only reasonable –
not absolute – assurance to management and the board
of directors regarding achievement of an entity’s
objectives.

• Management override of internal controls may be a
problem.

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Financial Statement Fraud

Fraud schemes occur because an employee – usually top
management – causes a misstatement or omission of material
information in the organizations’ financial reports.
• Methods include:

• Revenue Overstatement
• Recording gross, rather than net, revenue
• Recording of revenues of other companies, acting as a ‘middleman’
• Recording sales that never took place
• Recording future sales in the current period
• Recording sales of products that are out on consignment

• Expense Understatement
• Recording cost of sales as a non-operating expense
• Capitalizing operating costs
• Not recording some expense at all

• Improper Asset Valuations
• Manipulating reserves
• Changing the useful lives of assets
• Failing to take a write-down when needed
• Manipulating estimates of fair market value

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Miniscribe Fraud

• Top management committed the fraud and
overrode internal controls

• Company lacked independent members on its
Board of Directors

• Salaries and bonuses often depended on Miniscribe
“making the numbers”

• Inventory hole initially worth $2-4 million, then $15
million

• Miniscribe bought bricks to disguise as hard drives
and conceal as inventory worth $4 million

• Repeatedly signed management letter stating
financial reports were accurate and truthful

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Why does Financial Statement Fraud
Occur?

• Situational pressure
• Perceived opportunity
• Rationalization
• A culture is created and tone at the top

established that presents the image of a
company willing to do whatever it takes to paint
a rosy picture about financial results.

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Corporate Governance Structures
and Relationships

• Corporate governance is shaped by internal and
external mechanisms.

• Internal mechanisms help manage, direct, and monitor
corporate activities to create sustainable stakeholder
value.

• Examples: independent board of directors, the audit
committee, management, internal controls and the internal
audit function

• External mechanisms are intended to monitor the
company’s activities, affairs, and performance to ensure
that the interests of insiders (management, directors,
and officers) are aligned with the interests of outsiders
(shareholders and other stakeholders).

• Examples: the financial markets, state and federal statues,
court decisions, and shareholder proposals

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Best Practices of Governance

• Independent directors enhance governance
accountability

• Separation of the duties of CEO and board chair
• Separate meetings between the audit

committee and external auditors strengthen
control mechanisms

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Ethical and Legal Responsibilities
of Officers and Directors

• Directors and officers are deemed fiduciaries of the corporation as
their relationship with the corporation and its shareholders is one
of trust and confidence

• Duty of Care – act in good faith, exercise the care that an ordinarily
prudent person would exercise in a similar situation

• Duty of Loyalty – act in the best interest of corporation; loyalty can
be defined as faithfulness to one’s obligations and duties

• Duty of Good Faith – requires an honesty of purpose that leads to
caring for the well-being of the constituents of the fiduciary

• Business Judgment Rule – expected to exercise due care and to use
their best judgment in guiding corporate management, but they are
not insurers of business success; honest mistakes and poor
business decisions do not make them liable to the corporation for
resulting damages

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Audit Committee

• Independent directors with one having financial expertise
• Oversight of financial reporting

• Internal audit function
• External auditors
• CEO and CFO financial statement certification process

• Review formal announcements of earnings, significant financial
reporting judgments, internal controls and risk management
procedures, whistleblower and compliance program, external
auditor’s independence and objectivity and effectiveness of audit
process

• Seen as the one body that should be able to prevent identified
fraudulent financial reporting

• Committee should meet separately with the senior executives, the
internal auditors, and the external auditors

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Internal Auditors

• Monitor corporate governance activities and
compliance with organization policies

• Review effectiveness of the organization’s code of
ethics and whistle-blower provisions

• “Eyes and ears” of audit committee
• Assess audit committee effectiveness and

compliance with regulations
• Oversee internal controls and risk management

processes
• Assurance on how effectively the organization assesses

and manages its risk
• Assurance on data security and privacy controls

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External Auditors

• An obligation to the public interest that underlies
their corporate governance responsibilities

• Protect the interests of shareholders
• Conduct audits independent of any influence of

management or the company
• Communicate effectively with the audit committee:

accounting policies and procedures, estimates by
management; quality of financial reporting;
potential violations of laws

• Ensures accountability for financial reporting
process

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Internal Controls

• Prevent and detect errors and fraud
• Asset misappropriations
• Materially false and misleading financial reports
• Inadequate disclosures

• Ensure management policies are followed
• Ethical systems built into corporate governance
• Can be overridden by top management

• Do what CEO says, not what he does
• Creates cynical attitude
• Managers need to “walk the talk” of ethics

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