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Mary Beancounter is the new division controller of the snack-foods division of Great Tasting Foods. Great...

Mary Beancounter is the new division controller of the snack-foods division of Great Tasting Foods. Great Tasting Foods has reported a minimum 15% growth in annual earnings for each of the past 5 years. The snack-foods division has reported annual earnings growth of more than 20% each year in this same period. During the 2016, the economy went into a recession. The corporate controller estimates a 10% annual earnings growth rate for Great Tasting Foods this year. One month before the December 31 fiscal year-end of 2016, Beancounter estimates the snack-foods division will report an annual earnings growth of only 8%. John Bossy, the snack-foods division president, is not happy, but he notes that the “end-of-year actions” still need to be taken.

Beancoutner makes some inquiries and is able to compile the following list of end-of-year actions that were more or less accepted by the previous division controller:

  1. Deferring December’s routine monthly maintenance on packaging equipment by an independent contractor until January of next year.
  2. Extending the close of the current fiscal year beyond December 31 so that some sales of next year are included in the current year.
  3. Altering dates of shipping documents of next January’s sales to record them as sales in December of the current year.
  4. Giving salespeople a double bonus to exceed December sales targets.
  5. Deferring the current period’s advertising by reducing the number of television spots run in December and running more than planned in January of next year.
  6. Deferring the current period’s reported advertising costs by having Great Tasting Foods’ outside advertising agency delay billing December advertisements until January of next year or by having the agency alter invoices to conceal the December date.
  7. Persuading carriers to accept merchandise for shipment in December of the current year even though they normally would not have done so.

Required:

Beancounter is deeply troubled by these potential end-of-year actions. As a management accountant, write a formal business memorandum to the Division President, Mr. Bossy, about Beancounter’s concerns. In the memo, make sure to address each of the suggestions above and indicate whether they are (a) in violation of ethical standards and why, or (b) acceptable and why. Consider the “Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management” on page 18 of the textbook. Conclude the memo with a final recommendation to the Division President as to what action(s) should be taken by the company.

Solutions

Expert Solution

All management accountants are bound by their apex professional body, namely, the Institute of Management Accountants, to maintain basic common principles like honesty, fairness, integrity, knowledge, skill &objectivity in judgement along with maintaining highest standards when it comes to ethical behaviour, that speaks well of their alma mater.
They must endeavor to continously update their professional knowledge
comply with laws of the land
maintain personal & professional integrity
be fair and forthright in putting forward their findings, without fear or favor
constantly have the long-run welfare of the clients , for whom he is working, ie. Without suggesting any short-cuts or via media.
That said,
Mary Beancounter,the new division controller , is facing what is called the earnings management--ie.pushing up revenues for a fiscal period, by hook or crook. It is simply, managing earnings, almost always used in bad connotation.
Her concerns are addressed seriatim, as under.
a. Deferring December’s routine monthly maintenance on packaging equipment by an independent contractor until January of next year.
Doing so, will certainly infringe on the principles of fairness in reporting to the owners , if the amount is quite sizeable--as understandably, this year's revenues will shoot up , but next period's will suffer.Also there is the danger of the equipment , letting you down, which will have even more serious consequences.Being a party to this, Mary will also be transgressing her standards of competence, integrity & fairness , in hiding the facts.It is hishis duty to highlight , that this will be in violation of the GAAP also & will mislead users of the financial statements.
b.Extending the close of the current fiscal year beyond December 31 so that some sales of next year are included in the current year.
This is certainly unethical   & unaccepatble.Fiscal years are normally not extended, but in extreme circumstances
This will reflect on the un-timeliness as well as reliability of the accountants--also rendering both years' financial records , inaccurate --- also bringing dis-repute to the professional body , for not maintaining competency , reliability & integrity.
c.Altering dates of shipping documents of next January’s sales to record them as sales in December of the current year.
This also violates rules & principles & hence not acceptable--- as here also, even the next reports will be inaccurate.Even objectivity & fairness of theboth the periods' reports are bound to suffer & mislead all users.
Not only sales, other related accounts like accounts receivbales need to be manipulated , creating an assortment of lies, leading to credibility crisis.
d.Giving salespeople a double bonus to exceed December sales targets.
This is a sort of motivation to the company's employees & there is absolutely, nothing unethical about it--- but the company has to decide beforehand, if it can maintain this sort of extravaganza , in all the coming years--having given the sales people, a taste of it.These are acceptable only.
e.Deferring the current period’s advertising by reducing the number of television spots run in December and running more than planned in January of next year.
It is well within the company's rights to decide the timing & scale of advertising expenses--depending upon their revenue & expenditure budgets ---& plan accordingly-- absolutely a management initiative & a management accountant will not be jeopardising any of his professional ethics, with respect to this issue---- & hence acceptable only.
f.Deferring the current period’s reported advertising costs by having Great Tasting Foods’ outside advertising agency delay billing December advertisements until January of next year or by having the agency alter invoices to conceal the December date.
This is unethical & unacceptable --just like in a. above.--- expense belong to that period--revenues were earned for that period--matching principle of the GAAP , given the go-by---the management accountant will be failing I his duty for lack of fairness, integrity & competence ---not supported by the IMA ethics also,
g.Persuading carriers to accept merchandise for shipment in December of the current year even though they normally would not have done so.
This seems to be acceptable--ie.if the consignment is ready & the buyer is willing there is nothing wrong in pressurising the carrier to push up sales figure of teh current period.This is quite normal & nothing unethical.

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