Question

Sheldon Products produces plastic containers through a blow-molding process. The company uses process costing because its products are generally homogeneous and are produced in large batches.

Mitchell Jackson is the controller at Sheldon Products. It is December 31, 2017, and Jackson is supervising a physical count of all the inventory on hand. He knows it will be a tough year because of a sharp decline in sales near the end of the year.

In early December 2017, an earthquake struck in the southwestern Sichuan province in China. A major supplier of Sheldon Products sustained considerable damage in the earthquake, preventing this supplier from delivering critical parts to Sheldon Products in December. This shortage of raw materials has caused a decline in sales revenue for the last month in the year since production at Sheldon Products has stalled due to the lack of the critical parts from this supplier. Sheldon Products’ income will therefore be lower than projected for 2017.

If annual income targets are not met, the company will not be paying bonuses to its employees. Jackson feels that this decline in sales revenue is a temporary situation due entirely to the earthquake. It appears likely that the supplier for these parts will be able to supply Sheldon Products with all of the parts it needs by the end of February 2018.

As Jackson is supervising the physical count on the last day of the year, he edits some inventory records to show more inventory items on the floor on December 31, 2017, than are actually in inventory.

Jackson justifies his action by thinking that the missed sales will actually be made up in January and February (of 2018) when the supplier gets back on track with shipments. The decrease in sales revenue the company experienced in December is only a temporary timing difference. He is concerned that if bonuses are not paid to employees because of this timing difference, Sheldon Products could lose some of its best employees to competitors that are offering higher wages. Sheldon Products has always used the bonuses as a key component of its talent recruiting and retention strategy. Jackson himself has verbally promised bonuses to key employees he has recruited during 2017, as have other managers.

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 Jackson’s responsibilities as a management accountant?

How would recording more units than are actually in inventory impact the 2017 balance sheet and income statement? How would it impact the 2018 balance sheet and income statement?

Discuss the specific steps Jackson 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.

(Your original discussion reply that you post should be at least 200 words in length

Answer 1

1.      As a managerial accountant, Jackson’s responsibilities are to act ethically. The ethical issues in this situation are:

a.       Competence: “Perform professional duties in accordance with relevant laws, regulations, and technical standards.” By changing the inventory records to show more inventory than actually exists, Jackson is violating regulations and laws about reporting.

b.      Competence: “Provide decision support information and recommendations that are accurate, clear, concise, and timely.” By changing the inventory records, Jackson would be providing inaccurate and unclear information that would affect business decisions about that line.

c.       Credibility: “Communicate information fairly and objectively.” By adjusting the records, he is not reporting information fairly or objectively.

d.   Integrity: “Mitigate actual conflicts of interest.” Because Jackson is concerned about the granting of bonuses to other employees, there is a conflict of interest. He has verbally promised bonuses to key employees he has recruited and does not want to go back on his word. This is a factor in his decision to overstate ending inventory. However, this is not a good reason to overstate ending inventory.

2.   Recording more units than are actually in inventory would impact the 2017 balance sheet and income statement by having the ending inventory overstated (net income overstated) and the 2018 beginning inventory overstated (net income understated).

3.   He should bring up his concerns about the bonuses and losing employees to the supervisory staff members above him who can control bonuses and personnel decisions. He should not overstate the inventory.