Question

M.K. Gallant is president of Kranbrack Corporation, a company whose stock is traded on a national exchange. In a meeting with investment analysts at the beginning of the year, Gallant had predicted that the company’s earnings would grow by 20% this year. Unfortunately, sales have been less than expected for the year, and Gallant concluded with two weeks of the end of the fiscal year that it would impossible to ultimately report an increase in earning as large as predicted unless some drastic action was taken. Accordingly, Gallant has ordered that wherever possible, expenditures should be postponed to the new year – including canceling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-the-year advertising and travel. Additionally, Gallant ordered the company’s controller to carefully scrutinize all costs that are currently classified as period costs and reclassify as many as possible as product costs. The company is expected to have substantial inventories of work in process and finished goods at the end of the year.

1. Identify at least two viable alternative courses of action that you might take to address this ethical issue.

2. Make and justify recommendations for successful resolution of the ethical dilemma.  

Answer 1

The two viable alternative course of action provided in this case are

1. Gallant has ordered that wherever possible, expenditures should be postponed to the new year – including canceling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-the-year advertising and travel.
2. Gallant ordered the company’s controller to carefully scrutinize all costs that are currently classified as period costs and reclassify as many as possible as product costs.

A corporate controller is responsible for providing investors, lenders and other stakeholders with an accurate view of the firm’s financial condition. Controllers ensure that accounting procedures are in place and that internal controls are functioning properly. In order to remain credible, a controller must consistently behave in an ethical manner in both private and professional life. A personal lapse may call the integrity of the financial results into question and shake public confidence in the company.

Professional Competence

Because of the sensitive nature of accounting data, a controller must meet minimum standards of professional competence. She must keep that knowledge up to date by staying abreast of industry developments and enrolling in continuing education classes. In its Statement of Ethical Professional Practice, the Institute of Management Accountants states that controllers have an ethical duty to disclose any professional limitations or deficiencies that may prevent them from performing their job duties effectively.

Due Care

Financial results may be misinterpreted if accounting standards are applied in an improper or inconsistent manner. A controller must exercise due care in the creation of financial statements and the reports that support them. The American Institute of Certified Public Accountants defines due care as a "quest for excellence." This is the standard controllers should strive to attain. Failure to do so may result in misstatements that could damage stakeholder confidence in the firm.

Objectivity

As the person responsible for preparing the financial statements, the controller must be objective. Accounting regulations include hard and fast rules that are used to present results fairly. When these rules are inconsistent with management directives, controllers may face pressure to "cook the books" and present a financial result that is neither fair nor accurate. To be effective, a controller must stand firm against such challenges even at the risk of losing his job.

Integrity

When choosing a controller, senior management must take great care to consider both the personal and professional behavior of candidates. If the controller behaves inappropriately, the firm’s financial results and controls may be called into question. That is why companies like pharmaceutical giant McKesson have adopted specific policies governing the personal behavior of top financial executives, including the controller. A good controller understands this responsibility and strives to behave in an exemplary manner at all time.

To address these ethical issue the following alternative course of action can be taken-

1. I should ask the management that management action to record the transaction in next accounting year is not right and cost which are of periodical nature can not be treated as product cost because they are to be followed as per US GAAP and other standards prevailing in the country.It is not up to the wish of the management to classify these cost as per their requirement.
2. If Management won't agree with me then I will prepare a qualified report clearly Highlighting in bold that the management has treated these item in such a way that it would results to increase in profitability of the business.So the financial statement of the company does not give a true and fair view of the financial performance of the business.