Harry Smith owns and manages Harry’s Restaurant, a 24-hour restaurant near the city’s medical complex. Harry employs 9 full-time employees and 16 part-time employees. He pays all of the full-time employees by check, the amounts of which are determined by Harry’s public accountant, Pam Web. Harry pays all of his part-time employees in cash. He computes their wages and withdraws the cash directly from his cash register. Pam has repeatedly urged Harry to pay all employees by check. But as Harry has told his competitor and friend, Steve Hill, who owns the Greasy Diner, “First of all, my part-time employees prefer the cash over a check, and second, I don’t withhold or pay any taxes or workmen’s compensation insurance on those wages because they go totally unrecorded and unnoticed.”
(a) Who are the stakeholders in this situation?
(b) What are the legal and ethical considerations regarding Harry’s handling of his payroll?
(c) Pam Web is aware of Harry’s payment of the part-time payroll in cash. What are her ethical responsibilities in this case?
(d) What internal control principle is violated in this payroll process?