Cardillo Travel Systems, Inc.

CASE 5.1

CARDILLO TRAVEL SYSTEMS, INC.

Synopsis

Auditors and accountants are frequently forced to resolve ethical dilemmas in their professional roles. There is often a significant price to be paid by the accountant or auditor who chooses the ethically “correct” resolution to such a dilemma. For instance, an auditor may lose a lucrative engagement as a result of complying with the profession’s ethical principles. Of course, if an ethical dilemma is resolved improperly, the consequences can also be very serious for the individual and his or her employer. In this case, a controller and two audit partners were faced with ethical dilemmas. An overbearing and somewhat desperate CEO needed to increase the stockholders’ equity of his company, Cardillo Travel Systems, Inc., to satisfy a court order issued in a civil lawsuit filed against the company. To accomplish this objective, the CEO attempted to convince the company’s controller and the two audit partners to accept an illicit journal entry that significantly increased the stockholders’ equity of Cardillo. To their credit, the controller and both of the audit partners resisted the CEO’s efforts to influence their professional judgment.

Cardillo Travel Systems, Inc.—Key Facts

1. During the early 1980s, Cardillo incurred significant operating losses even though it was experiencing rapid growth in revenues as a result of Rognlien’s aggressive franchising strategy.

2. The court order outstanding against Cardillo required the company to maintain total stockholders’ equity of at least $3 million.

3. The $203,000 payment by United Airlines to Cardillo was intended to reimburse the latter for expenses incurred in changing to the United Airlines reservation system.

4. Recording the $203,000 United Airlines payment as commission revenue allowed Cardillo management to maintain stockholders’ equity above $3 million.

5. Cardillo’s executives attempted to conceal the true...