Question

Gutierrez Company, a publicly held corporation, operates a regional chain of large drugstores. Each drugstore is operated by a general manager and a controller. The general manager is responsible for the day-to-day operations of the store, while the controller is responsible for the budget and other financial tasks. The general manager, Tracie Kappan, has been at Gutierrez Company for several years. Employee turnover is high at Gutierrez Company, just as it is in the retail industry in general. Kappan just hired a new controller, Min Yang.

Yang was asked to prepare the master budget. Each retail location prepares its master budget once a year and then submits that budget to company headquarters for approval. Once approved by headquarters, the master budget is used to evaluate the store’s performance. These performance evaluations directly affect the managers’ bonuses and whether additional company funds are invested in that location.

When Yang was almost done preparing the budget, Kappan instructed him to increase the amounts budgeted for labor and supplies by 20%. When asked why, Kappan responded that this budgetary cushion gives store management flexibility in running the store. For example, because company headquarters tightly controls operating funds and capital improvement funds, any extra money budgeted for labor and supplies can be used to replace store furnishings or to pay bonuses to help to retain good employees. She explains that the chance of getting extra funds from company headquarters is not good; this “cushion” is usually the only opportunity to replace store décor or to pay bonuses to key employees. Kappan also needs extra funds occasionally to make “under the table” payments to employees as incentives to work extra hours or to keep them from leaving for a higher-paying job.

Yang feels conflicted. He is eager to please Kappan, and he is wondering what he should do in this situation.

Requirements:

Using the IMA Statement of Ethical Professional Practice(Exhibit 1-7 pg.13 of the textbook) as an ethical framework, answer the following questions:

What are the ethical issue(s) in this situation?

What are Yang’s responsibilities as a management accountant?

Would your answer differ if Gutierrez Company were instead owned by one individual instead of being publicly held? Why or why not?

Would anyone be harmed if slack were to be built into the budget? Why or why not?

Discuss the specific steps Yang should take in this situation. Refer to the IMA Statement of Ethical Professional Practice(Exhibit 1-7 pg.13 of the textbook) in your response.(not less than 200 words)

Answer 1

Answer:

1.         

a. The ethical issues are:

Competence: “Provide decision support information and recommendations that are accurate, clear, concise, and timely.” If he inflates the budgeted amounts for labor and supplies, he will be providing inaccurate and unclear information.

Integrity: “Abstain from engaging in or supporting any activity that might discredit the profession.” By deliberately misreporting the budgeted amounts, Yang would potentially discredit the profession.

Credibility: “Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.” By inflating the numbers, Yang is not providing all of the relevant information that could influence users’ understanding of the report.

b.   His responsibilities as a management accountant are to report the budget objectively and accurately; he has a responsibility to report the accurate information.

2.   

The answer would not be different depending on the ownership of the corporation, because reporting accurate information is still a requirement of management accountants.

3.   

The corporation as a whole could be harmed, which would potentially also harm the shareholders or owners. By building slack into their budget, they are removing money from the pool available to all the other stores, which could also hurt the employees in the other locations.

4.   

In this situation, he should report the information accurately. He should also discuss with the HR branch about being pressured into misreporting the information.