Question

Problem: Ethics in Business

The top management of Solar Electronics, Inc., is well known for “managing by the numbers.” With an eye on the company’s desired growth in overall net profit, the company’s Chief Executive Officer (CEO) sets target profits at the beginning of the year for each of the company’s divisions. The CEO has stated his policy as follows: “I won’t interfere with operations in the divisions. I am available for advice, but the division vice presidents are free to do anything they want so long as they hit the target profits for the year.”

In late November, Stan Richard, the vice president in charge of the Cellular Devices Technologies Division, saw that making the current year’s target profit for his division was going to be very difficult. Among other actions, he directed that discretionary expenditures be delayed until the beginning of next year. On December 30, he was angered to discover that a warehouse clerk had ordered $350,000 of parts in mid-December. The parts were needed by the assembly department to keep the inventory at the required level. Solar’s Accounting Policy Manual states that such parts are to be recorded as an expense when delivered. To avoid recording the expense, Stan asked that the order be canceled, but the purchasing department reported that the parts had already been delivered and the supplier would not accept returns. Because the bill had not yet been paid, Stan asked Nora, the accountant in the division, to delay the recognition of the delivery until the bill is paid in January. Nora was in a dilemma of whether to follow her boss.

Answer the following questions:

(1) What are the ethical issues in this case?

(2) Identify the stakeholders (six, at least) whose interests were affected by delaying the recognition of the expense.

(3) In what ways which Solar’s interest was affected if Nora followed Stan’s instructions?

(4) In what ways which the stakeholders in (2) (except for Solar) were affected if Nora followed Stan’s instructions?

(5) According to the IMA’s Statement of Ethical Professional Practice, would it be ethical if Nora followed Stan’s instructions? Which areas of the IMS’s Statement are violated?

(6) State three actions which Nora could take in this situation?

(7) What is your choice in (6)? Explain.

Answer 1

(1) The ethical issues in this case have arisen due to vice president's action of asking the accountant to defer the purchase expenses of $350,000 until the bill is paid in January. This is totally against the fundamental principles of accrual accounting which states that expenses have to be recognised as and when they incurred irrespective of whether payment is made or not. Deferring such an expenditure will show false profits and break public trust in the financial statements of the company.

2) The stakeholders who were affected by the vice president's actions to defer the recognition of the expense are as below:

(i) Shareholders of the company

(ii) Creditors

(iii) Employees

(iv) Directors/Management of the company

(v) Government

(vi) Competitors

3) The following will be the implications if Nora followed Stan's instructions:

(i) Solar's profit for the current year will show an inflated number which in turn will falsely increase the share price of the company and shareholders value

(ii) The action will also result in breaching the company's accounting policies.

4) The ways in which other stakeholders are affected if Nora followed Stan's instructions are as follows:

(i) Delaying the recognition of the expense will result in delayed payments to the supplier and may put him in risk of non payment as well.

(ii) The shareholders will be affected since the company will report higher false profits for the current year and increase the values of their stock holding.

(iii) Going against the company's policy and false reporting may result in Nora being fired from her job.

(iv) The competitors will also be affected since if the company shows false higher profits they will want to change their plans.

(v) This move will affect the management and other directors which may motivate them to take unethical steps in the same manner to achieve numbers.