Question

Steve Waller is the corporate accounting manager for Giant Video Stores. As part of the budgeting process for the entire corporation, he has asked the manager of each video store to prepare a store master budget. The manager of one of the largest stores, Jeff Miller, decides to understate the sales budget and overstate all the budgets related to expenses. Jeff believes this is a more conservative approach than using the estimated numbers he honestly believes will be achieved for the year. He also thinks that the corporate office will look more favorably on his store’s actual achievements when they are subsequently compared to this budget. Jeff has asked Lisa Dorton, his assistant manager, to review the budget before it is submitted. Lisa is aware of the real estimates that Jeff made. What is the impact of Jeff Miller’s budget for the corporation? What ethical issues face Lisa Dorton?

Answer 1

Effect of Jeff miller's budget:

- As all expenses are overstated that means actual expenses are less than the recorded ones and sales budget is understated than its actual position. It means company is unable to meet its expenses or facing problems to do the same.

- This shows that company is facing trouble in its management and will soon incurr losses.

-Investors will form a negative attitude toward the company.

-Market share will go down. As investors will believe that company is unable to meet even its expenses.

-Goodwill will be reduced.

- As sales is the basis for master budget. Remaining budget will follow the same as sales budget is understated.

-Production budget , cash flow budget etc will be adversely affected by this.

-Poor state of management.

-Poor control over Inventory management.

- Badly effect the ability to forecast in the future.

-Conflict arises between planing and controlling.

Ethical issues that Lisa will face:

-Conflict of interest. As its not the correct budget, Lisa being aware of the actual situation can have a different opinion for the same.

-Honesty is one of the important ethical principle. Ethical budgeting involves giving decision-making power primarily to people whose financial priorities are honest and clear.

-Responsibility. It is the responsibility of the company to show the correct and clear picture of the organization.

-Loyalty is required from the employees and customers to the organisation.