Reference no: EM13382815

Harold is a pharmaceutical sales manager with IPSYS. The company produces generic versions of pharmaceuticals that have recently lost patent protection. The revenue model for the organization is to sell high volumes of these products at low margins in order to undercut the price of the drug's original manufacturer. As such, IPSYS has an aggressive sales strategy. The compensation for sales managers is largely derived from their individual sales targets as well as the sales from the group of sales representatives they manage.

The sales control system at IPSYS is quite antiquated. Salespeople fill out paper forms with the name of the customer, order volume, order date, and delivery date. IPSYS keeps these forms on file, and allows customers to submit them for dates well in advance of the actual purchase. This allows customers to order well in advance of their anticipated inventory needs. Harold records all the sales. He also issues all shipping orders for his own sales, and for the sales of his team, into a computer system. The inventory data are then managed by the central office. Because customers are not invoiced until the delivery date, sales commissions are issued based on this date, rather than the order date. All invoices are sent out from the regional offices by Harold and his fellow managers.

This month is year end. Harold noticed earlier in the day that his team members were behind on sales volumes and would not make their maximum bonus. However, by midafternoon of that day, sales slips were being turned in showing that orders had been made for enough product to satisfy the bonus requirement. The problem was that the delivery date was for the week following the year end, and so could not be counted toward the bonus. Harold decides to enter delivery dates as the last day of the month, so they can be included in the current year's revenues. He decides to allow the product to be delivered early, and makes a paper note to bill the customers on the real delivery date, not the false one he has just entered. Harold assumes everyone wins in this scenario - the sales team gets their bonuses, the company gets good sales, and the customers get their product a few weeks early without having to pay for it until the new year.

Required

Determine the allocation of revenue from bundled services using each of the following methods.

1. 1. Identify the two primary issues that agency theory addresses.
   2. Agency costs can be categorized as monitoring, incentive compensation, bonding, and residual loss. Identify three agency costs that have been, or will be incurred in this case, and indicate which category each belongs to. Your answer should identify costs in at least two of the agency cost categories.
2. COSO has identified eight components of enterprise risk management. These components assist the organization in identifying risk and developing a risk management plan. Two of these components are listed in the following table, along with an action for each component, specific to IPSYS.

COSO component	Action/activity for risk management planning
Internal environment	Ensure there is support for a risk management plan at all levels of IPSYS.
Objective setting	Objectives associated with rewarded bonuses should be set using achievable targets, taking into account that there has been a history of unethical behaviour. Also noting that bonus procedures need to be reviewed on a regular basis.

c. Complete the table by identifying the remaining six components. For each component, provide an action that the company can take to assist in risk management planning. The actions should be specific to IPSYS.

1. The types of risk an organization faces can be divided into four different categories. Based on these categories, describe the types of risks the company is subject to.
2. Harold's actions may lead an employee to become a whistle-blower. How might IPSYS create an environment where whistle-blowers feel safe to come forward?
3. Since Harold believes his actions create a win-win situation, is his behaviour ethically blameless? Explain the effect of this attitude on himself and others in the corporation.