Ethics Case 17–6 - VXI International - 401(k) plan contributions ● LO1You are in your third year as internal auditor with VXI International, manufacturer of parts and supplies for jet air- craft. VXI began a defined contribution pension plan three years ago. The plan is a so-called 401(k) plan (named after the Tax Code section that specifies the conditions for the favorable tax treatment of these plans) that permits voluntary contributions by employees. Employees’ contributions are matched with one dollar of employer contribution for every two dollars of employee contribution. Approximately $500,000 of contributions is deducted from employee paychecks each month for investment in one of three employer-sponsored mutual funds.While performing some preliminary audit tests, you happen to notice that employee contributions to these plans usually do not show up on mutual fund statements for up to two months following the end of pay periods from which the deductions are drawn. On further investigation, you discover that when the plan was first begun, contributions were invested within one week of receipt of the funds. When youquestion the firm’s investment manager about the apparent change in the timing of investments, you are told, “Last year Mr. Maxwell (the CFO) directed me to initially deposit the contributions in the corporate investment account. At the close of each quarter, we add the employer matching contributionand deposit the combined amount in specific employee mutual funds.”Required:1. What is Mr. Maxwell’s apparent motivation for the change in the way contributions are handled? 2. Do you perceive an ethical dilemma?Ethics Case 17-6Mr. Maxwell’s apparent motivation for the change in the way contributions arehandled is to have the company benefit from the earning power of the contributedfunds for up to three months, prior to the funds being deposited for the benefit ofthe employees. Temporarily diverting 401(k) funds this way benefits the companyat the expense of the employee. There is some question as to whether the practice described is illegal. Inpractice, such cases are rarely prosecuted. Regardless of the legality, though,there is the ethical question of whether the employer should earn dividends,interest, etc. on funds deducted from employees’ paychecks, prior to the fundsbeing deposited to the employees’