Question

(Disclosure of Estimates)

Nancy Tercek, the financial vice president, and Margaret Lilly, the controller, of Romine Manufacturing Company are reviewing the financial ratios of the company for the years 2017 and 2018. The financial vice president notes that the profit margin on sales ratio has increased from 6% to 12%, a hefty gain for the 2-year period. Tercek is in the process of issuing a media release that emphasizes the efficiency of Romine Manufacturing in controlling cost. Margaret Lilly knows that the difference in ratios is due primarily to an earlier company decision to reduce the estimates of warranty and bad debt expense for 2018. The controller, not sure of her supervisor's motives, hesitates to suggest to Tercek that the company's improvement is unrelated to efficiency in controlling cost. To complicate matters, the media release is scheduled in a few days.

Instructions

(a)  

What, if any, is the ethical dilemma in this situation?

(b)  

Should Lilly, the controller, remain silent? Give reasons.

(c)  

What stakeholders might be affected by Tercek's media release?

(d)  

Give your opinion on the following statement and cite reasons: “Because Tercek, the vice president, is most directly responsible for the media release, Lilly has no real responsibility in this matter.”

Answer 1

1. The ethical dilemma in this situation is faced by Margaret Lily. Since the profit to sales ratio has increased drastically in the last two years, the company's financial vice president wants to advertise this by making a press release. However, the increase in the profit to sales ratio is not because of cost efficiency but due to a change in accounting estimate. Margaret is aware of this.However, she does not want to report her superior as she is unaware about his/her intention. If she does not do so, incorrect information shall be made available to the public. This is primarily the ethical dilemma.

2. Lily, the controller, should not remain silent. If she remains silent, the stakeholder of the company shall be provided incorrect data. Many of them might base important decisions on the data provided. Thus, she should talk to the vice president about the change in accounting estimate for 2018.

3.The shareholders of Tercek company or potential investors who might invest in Tercek assuming that the company shall remian profitable in the coming years due to it's cost efficiency shall be affected adversely by this decision.

4. I believe that the statement mentioned is grossly incorrect. It is the responsibility of every employee of the company to ensure true and fair accounting and proper disclosures and not just the top management of the company. Lily is responsible as she possesses knowledge which might affect the decision of the stakeholders.