Susan Lemmon Student ID #50050475 Strategic Management 527.

7.002 Personal Ethics Situation Introduction As an Internal Auditor for a government contracting entity, it is not unusual to be asked to perform a variety of audits, investigations, or assist other segments with the documentation of their processes. During specific times of the year, I perform Sarbanes Oxley testing to communicate to management the efficacy of the organizations operating policies and procedures. This testing is used not only to determine the reliability of the organizations financial statements, but also to provide insight to management by identifying and defining issues within those policies and procedures that would improve efficiency, effectiveness, and ensure appropriate and/or applicable controls are in place. When not performing Sarbanes Oxley testing, another responsibility is to serve as a liaison to other divisions within the organization to assist in the identification, development, and documentation of audit and/or operating process issues and to provide recommendations for improvement. This is achieved by conducting employee interviews, reviewing documents used in the process, observation of the actual process, and assist in the writing of a narrative description of the process which is then used to perform Sarbanes Oxley testing. My final responsibility is to investigate situations related to telephone calls received by the organizations Ethics Hotline as assigned by Internal Audit. These anonymous messages consist of information pertaining to theft, embezzlement, time keeping violations, and a multitude of ethics violations. Once notified of the call, I perform an investigation utilizing the same techniques as previously described; namely, employee interviews, documentation review, observation, etc. After investigating each accusation, the result is usually a misunderstanding between an employee and their manager, a disgruntled employee trying to retaliate against the

Susan Lemmon Student ID #50050475 Strategic Management 527.002 company, or an employee just did not know a policy or procedure existed to explain the steps use dto complete a particular activity. You can then imagine my surprise as I witnessed a meeting between five top level managers of a sister division trying to determine whether to cover-up incorrect labor charging on a government contract and how it could be achieved. As I listened to all of the conversation between the five managers, I wondered if they realized that depending on the decision they made, it could result in a report to management about their unethical behavior. The Situation In late August, I was informed by my manager that a trip to our sister division in Waco, TX would need to be made in early September to review their Sarbanes Oxley process narratives. As there had been a recent change in upper- and mid-level management, it was unsure whether the current narratives accurately reflected the actual processes being performed. In order to speed the review process, it was determined that my manager would also make the trip in order to provide assistance and expedite the review and to circumvent any problems should they arise. Since the review would be performed by the two of us, it was determined only four days would be required to complete the entire process. The review process performance was running quite smoothly. In the first two days, a total of six processes had been reviewed and updated. Only three processes remained to be updated. As there was a lull in scheduled appointments with process owners for me, I decided to take the time to update my records regarding the trip. During the same period, my manager was having a conversation with a mid-level manager he had interviewed when she brought up a question regarding a mischarging of labor. As we were both assigned to the same conference room to perform our work, I could not escape from hearing the entire conversation.

Susan Lemmon Student ID #50050475 Strategic Management 527.002 According to the manager, all Bid and Proposal Department (B & P) employees are considered indirect employees. Indirect employees are those whose salaries and/or labor charges are charged as overhead to all contracts within the organization. A direct employees labor is charged directly to the contract that he or she is working on. She continued by stating there had been ongoing meetings between the B & P Department Manager and the Program Manager of a specific contract because one B & P employees time was being charged as indirect although he was performing as if he was a direct employee. According to the manager, the B & P employee had been sent to the customers home base to deliver several aircraft, provide instruction on the use of the equipment, and to serve as a liaison in the event there were any problems. The normal responsibility of a B & P employee, however, is to obtain information to develop contract bids and make subsequent proposals based on a bid to a prospective client. At no time does the B & P employee serve in the delivery person/liaison capacity as this employee was doing. After listening to the manager, my manager instructed her to assemble the V.P. of Finance, the B & P Department Manager, and the Program Manager because he needed to discuss the situation with them as quickly as possible. He expressed his concern that a decision would be made to continue with the indirect labor charging which the government would eventually find during one of their program audits. Once all of the individuals were assembled, my manager asked the B & P Department Manager to explain how he thought the labor should be charged and why. The manager stated the employees labor should be charged directly to the contract. He explained that he had no other employees who acted in the same capacity as this employee. All of his employees were assigned to multiple bid/proposal prospects, all related job functions were performed on sight, and each employee attended a required weekly B & P meeting where the status of their multiple

Susan Lemmon Student ID #50050475 Strategic Management 527.002 assignments were discussed. He continued by stating the discussed individual had been removed from all previously assigned projects to focus on the one contract, the job responsibilities he was performing was inconsistent with other employees in the same role, he did not attend any required weekly meetings, and the job duties he was performing required that he remain at the customers sight in New York. In closing, he stated the employees labor charges needed to be removed from his departments labor charges and be correctly charged to the contract. The Program Manager was the next to speak. He stated that he thought the individual should remain on the B & P labor roster. He stated the contract was currently in the finalization stage, and as such, would be ending soon. He indicated that because the employees labor amounts were immaterial to the overall contract amount, it did not make a difference in the overall effect of the profit or loss of the contract. In making his last comment, he laughed while stating that if attendance in a B & P meeting was all that was required to consider him a B & P employee, he would make sure he called in to all scheduled meeting. The final speaker was the V. P. of Finance. To begin, he was quick to state that the contract was currently in a loss position. He continued by stating that as such, the recording of the employees labor charges to the contract would not make any difference to profitability. He also stated that by charging the individuals labor charges and indirect, all contracts in operation were being affected by this charge no matter how miniscule. He said he wondered what the odds would be that the government would find out about the incorrect labor charging. What Happened While listening to this discussion, I wondered what would be the final outcome. Would the B & P Department Manager who knew the labor charging was incorrect be successful in having the employees labor removed from his department. Did the Program Managers

Susan Lemmon Student ID #50050475 Strategic Management 527.002 comment about the amount of the labor charges being immaterial have an impact? Would the V.P. of Finance decide to have the labor charges corrected because of the contract being in a loss position so profitability would not have been affected and, consequently, not threaten their relationship with the government? Unfortunately, there was no decision made during the meeting. Each of the individual managers held steadfast to their positions. Ultimately, the meeting moved to the office of the Divisional President for more discussion and a decision. What Should Have Been Done After hearing the statements from each of the departmental managers and the V.P. of Finance, the decision should have been made to correct the labor hours by removing them as indirect charges applicable to all contracts. The labor charges should then have been applied directly to the applicable contract on which the employee was working. As the employee was not reporting to the B & P Department Manager, but to the Program Manager, his duties were clearly out of the realm of a B & P department employee. Additionally, since the contract was in a loss position and the total labor charge was immaterial, the financial effect would have also been minimal except when applicable to the Program Managers bonus. My thought at the time was if the Program Manager is trying to justify this unethical transaction, what else is he hiding? Summary In my eyes, these managers do not understand the concept of tone at the top. This concept refers to how the organization's leadership creates an ethical, or unethical, atmosphere in the workplace. Management's tone has a trickle-down effect to its employees. If top managers uphold ethics and integrity, so will employees. However, if upper management appears unconcerned with ethics and focuses solely on the bottom line and what they can get away with,

Susan Lemmon Student ID #50050475 Strategic Management 527.002 employees will be more prone to feeling ethical conduct isn't as major a priority as what is conveyed through educational training receiver per corporate mandate. In short, employees will follow the lead of their managers. If it is alright for them to be unethical, the staff worker should not be held accountable to different standards. It is managements responsibility to develop a culture that demonstrates the companys ethics, honesty, and integrity.