Hutton

CASE: HUTTON BRANCH MANAGER (A) 9-396-044

1. Carefully explain Hutton’s cash management system. In what ways do you believe the system opened itself up to abuse and unethical behavior?

The Hutton’s cash management system was working based on the two major sources of income, “transferring funds from local banks to the central concentration bank as quickly as possible” and “deliberately over-drafting accounts to recapture lost interest income.” (page 8)

The Hutton’s philosophy behind its first strategy was using the time value of money during the incurred delays for processing checks and wiring moneys. Hutton believed: “Hutton, not unlike other corporate depositors, believes that it is entitled to share in the value of those funds while they remain in the process of collection in the payment system.” (page 8) To use its monies’ processing time value, Hutton followed two strategies. First, Hutton tried to shorten the process times by instructing branch managers to transfer moneys from local banks to its central concentration banks. This practice was neither illegal nor unethical. However, the second strategy targeted Hutton’s mailing and responsive system. Branch mangers started practicing mailing confirmation early and drafts late, developing short sales and margin accounts, charging account executives for waiving customers’ interest charges, limiting the number of customers on automatic dividend, and discouraging account executives from mailing out small credit balances. The second strategy resulted widely in mailing and wiring fraud, accounting mal practice, and unethical managerial procedures.

The Hotton’s second source was later considered unethical and condemned as abusing US banking system. Hutton’s practice in over drafting its non-interest bearing checking accounts was done in parallel with its malpractice in using collection floats. Hutton deliberately and intentionally over drafted its accounts in those banks that had...