Question

Ken Franklin is the sales manager of Davidson Enterprises, a very profitable distributor of office furniture to local businesses. A recent economic downturn has created an extremely tight cash position, and the company has been hurt by the bankruptcy of two key customers. In late October, anticipating an economic recovery, Franklin began an extensive remodeling of the company's sales floor. Construction costs, decorating, and equipment purchases are projected to cost $250,000. Davidson has a policy that individual expenditures in excess of $200,000 must be approved by the firm's board of directors. Franklin, unfortunately, missed the deadline to have the board consider this project at its regular September meeting. Not wanting to wait until the next meeting in December, he subdivided the project in two parts—construction and decorating ($190,000) and equipment purchases ($60,000)—neither of which needed board approval because of the dollar amounts involved. The project was recently completed, and sales have begun to recover. Customers have raved about the new sales area, noting that it is far superior to those of Davidson's competitors.

Required:

1. Would Franklin's approach of subdividing the project in two parts have any effect on the company's financial statements? Briefly explain.

2. Briefly discuss whether Franklin behaved in an ethical manner.

3. Which, if any, of the following standards of conduct would have applicability to Franklin's conduct: competence, confidentiality, integrity, or credibility? Briefly explain.

Answer 1

1. Would Franklin's approach of subdividing the project in two parts have any effect on the company's financial statements? Briefly explain.

Certainly Yes. Both expenses are of capital nature and so cannot be booked to a single year's accounts , but need to be treated as capital expenditure & depreciated over a pre-decided number of years.

In any case, they need to be explained to the directors sooner than later.

2. Briefly discuss whether Franklin behaved in an ethical manner.

When there exists a policy in Davidson that individual expenditures in excess of $200,000 must be approved by the firm's board of directors--- what Franklin did is clearly unethical only.

Franklin having missed to bring the issue in the September meeting , had taken a personal decision of not to wait until the next meeting in December and subdivided the project in two parts, on his own volition.

When there is a set of rules, come what may, one needs to abide by it---

That too, when the company is cash-strapped , what if , the whole thing has misfired?He would have landed himself in more trouble.Thankfully, things worked out in his favor and he is saved. But that does not justify his independent actions ,in matters, that need to be priorly-approved at Board level.

This could have set a precedent for other managers. What , if each one comes up with different circumstances , such as Franklin's?

So, it is clearly unethical & unacceptable & he should be told in very clear terms that also serve as warning to every other person/manager , in such roles.

They should also be assured that the Board will accede to their genuine suggetsions for improvement , to the extent possible & that they need not entertain any doubts about it.

3. Which, if any, of the following standards of conduct would have applicability to Franklin's conduct: competence, confidentiality, integrity, or credibility? Briefly explain.

His Integrity has taken a beating as he has proved by his actions , that he is likely to circumvent rules , if the situation demands.

Also his credibility , ie reliability in his behaviour would have reduced in the eyes of the Board members ,as he can do anything & will try to justify it later.