Question

Ethical Issues:

"Josey," Jordan asked with a puzzled look on his face. "I don't understand these regression results for our mixed costs.

" "What seems to be the problem?" Josey asked, looking over his shoulder at his spreadsheets.

"Well, I used direct labor hours, like you said, and it seems to be a great driver for cleaning supplies and a pretty good driver for parts and repairs, but it isn't a good driver for our utilities bill."

"What's wrong with that?"

"Well, I would have expected our utility bill to be pretty constant. I mean, the lights are pretty much always on, the water usage is pretty constant, and none of our machines are that energy intensive. So why is it jumping around so much?"

"Well," Josey said sitting down in a chair. "The utility bill itself is pretty constant. But I use the utility expense account as kind of a 'miscellaneous expense.' Any time I have to buy miscellaneous items for the office, or when we have an office party for a holiday or celebration, I just debit utilities expense."

"Why?" Jordan asked.

"Well, for one thing it's easier. For another, no one really looks at utilities expense, so I don't have to spend a lot of time explaining those costs."

"Doesn't that mess up our numbers and our budgets?"

"Not materially. Because the cash flows are all accounted for and since everything balances, I just decided that it wasn't worth my time, not with everything else I have to do with only you to help me."

1. What concerns do you have about Josey's response to Jordan's questions?

2. What are the consequences of recording these expenses inappropriately? Do you really think it makes any difference to the company?

3. What consequences might Jordan face if he continues to argue with his new boss?

4. What options does Jordan have for resolving this issue? Which of your options do you think he will choose?

Answer 1

In this case the issue at hand is that the utilities expense a/c is being used to record miscellaneous expenses such as purchase of office supplies and expenses incurred for office party or holidays. It hasn't been checked because nobody worries about the utilities a/c and maybe even the amounts are small that they don't draw an eye.

But, this shows disguised dishonesty in accounting and may give Josey the immunity later to use funds for his personal expenses while debiting them to office expense accounts or even misappropriation of cash. This also distorts users understanding of the financial statements and becomes an example of unfair accounting.

In the short run it seems that recording expenses inappropriately, does not affect the financial statements technically because the expenses are all office related expenses, they are made from cash available and the balance sheet tallies.

Now for example while preparing monthly or annual budgets, if the manager allocates a certain amount towards utilities expenses on the basis of such accounts then more money will be available with Josey even after paying the relatively stable utility bills and if its a month that does not require purchasing office supplies or parties, then Josey will have to spend the excess money allocated in the budget to justify. How and where he spends this money may later become a problem.

Now in reality, if Jordan tries to rationalize with Josey he may face dire consequences in his job or may even get fired depending upon the type Josey is. Jordan has to first try to explain the situation and its consequences rationally to Jordan. If Jordan puts his foot down and does not agree and this problem continues in the next month or so, then it may have to be reported to a higher authority.