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The Ethical Temperature in Arcticview

Mary Benninger had sought out her old friend, Tom Chu, to discuss her employment situation. Mary and Tom had both graduated in 1985 from Mackenzie King University, and then studied together to attain their CMA designations in 1988. Soon thereafter, Tom was promoted quickly within his division of a large multi-national auto supply company, and now held the position of vice-president/controller. Mary, on the other hand, had temporarily removed herself from full-time employment in 1990 to raise her young daughter. She kept herself up-to-date professionally and handled the occasional short-term consulting assignment. Six months ago, Mary had re-entered the workforce, her return accelerated by the fact that her husband, Frank, had been stricken by a debilitating illness. It had surprised Mary somewhat that she was able to land a position quickly as controller and office manager for Hewsen Chemical Inc., a small, privately-held producer of specialty chemicals used in testing labs and other manufacturing firms. Hewsen was a relatively new and growing company with innovative ideas, and Mary was pleased and excited to have had the good fortune to join its management team. Today, however, meeting with her CMA colleague and trusted friend, Mary was troubled. "I don’t know what to do, Tom. I thought I was taking on an ideal position, an emerging company, with flexible working hours, decent pay and a good benefits package to help with Frank’s medical expenses. But the situation sure turned sour quickly. I really don’t know who to talk to. In fact, Tom, I’m not sure that I should be talking to you." "Nonsense," said Tom, "You know you can count on me after all we’ve been through together. Tell me what’s going on." "Well," said Mary, "Initially, things were going very well for Hewsen Chemical. None of the larger companies were interested in the small niche market that Hewsen had carved out. Sales grew rapidly and, because of our success, Dusque, the big integrated chemical conglomerate, set up a subsidiary to compete with us. Since then, we’ve taken a real hit in sales and profits. Our business is down 30 per cent, and the new plant that we built in Brampton three years ago is operating at 50 per cent of capacity." "That’s certainly not good news," said Tom, "Have you got your expenditures under control?" "I gather we were never very good at cost control and internal controls were virtually non-existent. When we were growing so quickly, sales were more important than costs. When things got tough, they dismissed my predecessor and hired me. They told me that I could have free rein to implement whatever I thought was necessary. And boy, are some changes ever necessary! Our senior staff really don’t know the difference between personal and corporate spending, and I think our sales and marketing expenses are double what they should be. It will be a challenge to sort that out, but I’m pretty sure I can get this under control. The really big problem that has me worried is our northern development grant." "I don’t know a lot about government grant programs," cautioned Tom, "but tell me more." "When business fell off, Brian Hewsen, our president, attended a seminar on how to get government grants. He discovered that a matching program was available for firms to establish northern manufacturing facilities. So, Brian and our V.P. of operations submitted a grant proposal for us to manufacture chemicals in Arcticview, a remote village with about 2500 people, where the mines have been phasing out. The proposal was simply an adaptation of an earlier unsuccessful grant application for our Brampton operations. The government must have been real anxious for someone to locate in Arcticview, because the new proposal was accepted in a wink this time. Moreover, both levels of government have provided matching funds of $750,000,a total of one and a half million in government money. They also guaranteed a bank loan for us of $750,000, and we used the loan proceeds as our contribution." "Well, that sounds great, Mary. What’s the problem?" "After the funds were provided, we rented a temporary facility in Arcticview and we hired a few staff there to maintain the building. However, we told the Ministry of Northern Development that the new equipment needed to be tested and the manufacturing process needed to be developed further. So the equipment was delivered to our Brampton facility. The equipment is currently being used there to streamline our manufacturing of a new line of chemicals that should allow us to regain much of the market share we lost to Dusque. The problem is that the grant requires us to use the funds in Arcticview." Tom jumped in, "But will anybody check on how the funds are really being used?" "That’s what I’m worried about, Tom. At the present time, one of my tasks is to ensure that optimistic reports are sent about how the development work is coming. In the short run, I could handle this because there was a real need to shake down this new equipment. The supplier had suggested two months, but we have already been ‘testing’ the equipment for six months in Brampton, and Brian is hoping that we can continue to ‘test’ it for a full year." "Well, after the year, they’ll simply move the equipment up to Arcticview and your problems will be over!" "No, Tom, that’s when my problems will really start. You see, there is absolutely no way that we can turn a profit up in Arcticview. We would have to transport all the raw materials up there, and then ship the finished product back here. Dusque will soon be competing in our new line of chemicals and, even though they don’t have our advanced technology as yet, they will be able to beat us on cost because of the transportation factor." "I see. Then you’ll have to shut down operations and return the funds?" Mary’s reply was terse. "We can’t. If we shut down operations here, we don’t have enough funds to repay the loan and, apart from Dusque, I doubt we could find a buyer for the equipment. Besides, we would be operating below break-even on the balance of our operations." "Wow! Major problems. Does management have any ideas on how to work things out?" "Well, the size of this new equipment is quite portable as only small quantities of the chemicals are produced in each batch. Brian would like to ship the equipment to Arcticview for a startup phase, and temporarily move workers up there from the Brampton plant, while the government publicity photos are being taken. After a discreet period of time, he’ll return the equipment to Brampton, and bring the workers back down. We’ll continue to ‘produce’ chemicals in Arcticview with a few local workers, but the real operations will be here in Brampton. The grant contract states that the company is obligated to produce in Arcticview for a minimum of three years. So, Brian figures that if we can last for two years past the testing period, we will be able to keep the equipment and keep the company viable." "But surely some government audits are necessary, Mary. What will you do then?" "Believe it or not, Tom, the only audited statements the government requires are our financial statements from our external auditors. Brian figures that the auditors aren’t particularly concerned about where we manufacture but, to give the impression of a high level of activity in Arcticview during the audit, he’ll temporarily ship some people and equipment up there. Our auditors don’t really know the technical aspects of our business and, as long as we can document all the equipment, labour and inventory, we’ll probably be okay with them. One of the things I could do as well, is to bill as much of our supplies as possible to the Arcticview plant and minimize the amount billed through to Brampton. Some of our labour costs down here might even be billed through to Arcticview when you consider that a few of our Brampton workers will, in effect, serve as consultants to the northern facility." "Brian and our V.P. of operations will have to submit an annual written report on how the grant is being used, but for my part, all I have to do is contribute a brief statement on the ‘testing and setup’ along with the financials. I’m hoping that I won’t even have to see their finished report!" "Gee, Mary, I can see why you’ve got a bit of a worry here," Tom injected. Mary continued, "Brian and the other senior managers tell me not to worry. They say that everybody does this for tax reasons. They also figure that nobody could really operate a manufacturing facility in Arcticview anyway, because suppliers and markets are just too far away. They speculate that training costs alone up there could blow our grant budgets and, you know, I agree with them that the government just wants to wave the flag a little bit for votes. Besides, we are giving a few local people employment as custodians of the northern plant, and we are managing to keep Hewsen Chemical afloat during this tough time. Brian is also particularly miffed that Dusque got a major government supply contract away from us, and argues that this government grant merely puts us back on a level playing field." "Tom, I’m really bewildered here. On the one hand, as I think about it, the financial statements will be perfectly accurate and consistent with previous years, so I don’t believe that anyone could nail me on an ethics question there. But I did sign a very restrictive employment contract (see insert) that states that I can’t talk to anyone. I’ve violated it already by talking to you, and of course Frank. And I’d surely be violating it, and perhaps my professional code of ethics, if I talked with the government. Heaven knows that Frank and I need the money and Hewson’s health care package,and there are 60 other employees in Brampton that need their jobs too. I’m having difficulty sleeping at night, but Frank keeps telling me to simply ignore the issue and do what I’m told. In all other aspects, this could be a great job and, if we pull this off, Brian says he’ll cut me in for equity participation. If I quit, it won’t be easy to get another job and you can be sure that Brian would not be helpful in getting me placed." Employment contract, Hewson Chemical Inc. The Employee expressly covenants and agrees that he/she will not, at any time during or after his/her employment with the Company: a) reveal, divulge or make known to any person, firm or corporation, the contents of any formula, chemical compound, product or other substance owned or developed by the Company; or the method, process or manner of manufacturing, compounding or preparing any such formulae, compounds, products or substances; or sell, exchange or give away, or otherwise dispose of any formula, compound, product or substance now or hereafter owned by the Company, whether the same shall or may have been originated, discovered or invented by the Employee or otherwise; b) reveal, divulge or make known to any person, firm or corporation, any secret or confidential information whatsoever, in connection with the Company or its business; or anything connected therewith; or the name of any other information pertaining to its customers or suppliers; c) solicit, interfere with or endeavour to entice away from the Company, any customer or supplier or any other person, firm or corporation having dealings with the Company; or interfere with or entice away any other officer or employee of the Company. If you were Mary, what would you do?

Please post your responses below by due date as instructed. Please attempt at least 5 of the following questions as optional assignments. However, a maximum of extra 10 points (equivalent of about 2 points toward course grade) will be awarded, if attempted and substantiated. 1) "A balance of trade deficit must always be offset by net capital inflows from abroad." Agree or disagree with this statement and explain. 2) Suppose a Japanese firm buys a 1 year treasury bill with a face value of $10,000 today for $9400. If the value of the dollar declined from 90 to 80 yen during the year, what rate of return does the Japanese firm earn on its investment? 3) Draw a supply-demand diagram of the foreign exchange market for the dollar (valued in euros/$) Show the effects of the following events on the exchange rate. Explain your reasoning! a) The release of data showing stronger than expected RGDP growth in Germany. b) An increase in the federal funds rate by the Federal Reserve c) An announcement that U.S. trade deficits for the last quarter were much larger than previously expected d) A larger than expected increase in hourly wage rates in the US. 4) If the Fed wished to defend the exchange rate of the $ (i.e. prevent the $ exchange rate from falling) what policy action could it take? Explain. 5a) What is the "purchasing power parity" theory of exchange rates? If the price of a representative bundle of tradable goods is currently $5000 in the U.S. and 550000 yen in Japan, is the $ undervalued or overvalued when the exchange rate is 90 yen per $? 5b) Why don't actual exchange rates move to purchasing power parity levels in the short run? 6) The treasurer of a U.S. firm noted that although short run deposits in Swiss bank accounts had earned the firm only a 3% annualized return when measured in Swiss francs, in dollars the firm had realized a 12% rate of return. Explain as precisely as possible how this was possible. 7) In recent years the exchange rate of the $ has been noticeably high against the yen. If for some reason investors around the world now decide that this increase is a temporary phenomena and that the $ will fall relative to the yen in coming months, what would be the effect on prices of U.S. Treasury Securities? Explain. 8) Do US producers of tradable goods prefer a strong dollar or a weak dollar in currency markets? Explain.

Question One ZAMPORK LTD Zampork Ltd is one of the fastest growing companies in Zambia, and its stock price is increasing at a rate of 100 percent a year, to the delight of its shareholders. Achieving this high return has been a constant challenge for the company. The company was founded by David Changata in 2001 after he retired from the Bank of Zambia. Changata used the generous retirement package to start a pork meat business at his small holding in Lusaka West. He soon realized that there was a high demand for pork and pork products in Lusaka and the rest of Zambia. He teamed up with some investors and, with the new capital infusion, turned his family business into a public company. Initially and before going public, Changata personally undertook most of the functions with the help of a nephew who had failed to proceed to Grade 8. While his nephew was charged with the cleaning of the pig sty and feeding of the animals, Changata superintended the slaughter of the animals, the cutting and packing of the meat, the keeping of the books, and the sales and marketing. Increasing demand for his pork products meant that within a few weeks he needed to hire people to help him, and soon he found himself supervising three additional employees who worked together with his nephew in the pig sty and took orders over the phone. By 2005, Zampork Ltd. employed 500 workers and was hiring over 10 new workers each week just to keep pace with the demand for pork. When he found himself working eighteen-hour days managing the company, he realized he could not lead the company single-handedly. The company’s growth had to be managed, and he knew that he had to recruit and hire strategic managers who had experience in managing different functional areas, such as marketing, finance, and production. He recruited executives from Zambeef and with their help created a functional structure, one in which employees are grouped by the common skills they have or tasks they perform, to organize the value-chain activities necessary to deliver pork products to customers. As a part of this organizing process, Zampork’s structure also became taller, with more levels in the management hierarchy, to ensure that he and his managers had sufficient control over the different activities of his growing business. Changata delegated authority to control the company’s functional value-chain activities to his managers, which gave him the time he needed to perform his managerial task of finding new opportunities for the company. The company’s functional structure worked well, and under its new management team, the company’s growth continued to soar. By 2009, the company had sales of over K2 million, twice as much as in 2002. Moreover, Zampork’s new structure had given functional managers the control they needed to squeeze out costs, 3 and Zampork had become the lowest-cost pork producer. Analysts also reported that Zampork had developed a lean organizational culture, meaning that employees had developed norms and values that emphasized the importance of working hard to help each other find innovative new ways of making products to keep costs low and increase their reliability. Indeed, with the fewest customer complaints, Zampork rose to the top of the customer satisfaction rankings for meat producers; its employees became known for the excellent customer service they gave to pork buyers. However, Changata realized that new and different kinds of problems were arising. Zampork was now selling huge quantities of pork to different kinds of customers, for example, households, organizations, and different kinds of businesses. Because customers now demanded pork with very different features, the company’s product line broadened rapidly. It started to become more difficult for employees to meet the needs of these different kinds of customers efficiently because each employee needed information about all product features. In 2008, Zampork changed its market structure and created separate divisions, each geared to the needs of a different group of customers; a consumer division, a business division, and so on. In each division, teams of employees specialized in servicing the needs of one of these customer groups. This move to a more complex structure also allowed each division to develop a unique subculture that suited its tasks, and employees were able to obtain in-depth knowledge about the needs of their market that helped them to respond better to their customers’ needs. So successful was this change in structure and culture that by 2009 Zampork’s revenues were over K30 million and its profits were in excess of K2.5 million, a staggering increase from 2001. Changata has continued to alter his company’s structure to respond to changing customer needs and to the company’s increase in distinctive competencies. For example, Changata realized he could leverage his company’s strengths in materials management, production, and credit sales over a wider range of pork products. So he decided to begin producing and packaging pork of different types and to compete with other pork producers and Zambeef. The increasing importance of the credit led him to split the market divisions into thirty-five smaller subunits that focused on more specialized groups of customers, and they all now conduct the majority of their business by credit. Today, for example, Zampork can offer its customers a complete range of pork products, and storage devices that can be customized to their needs. Source: Charles W.L. Hill and Gareth R. Jones (2007), Strategic Management, New York: Houghton Mifflin Company REQUIRED: (a) Identify and describe the strategies that have characterized the company’s progress 4 (b) Analyse how the company implemented its strategies.

Veekay Company was organized on November 1 of the previous year. After seven months of start-up losses, management had expected to earn a profit during June, the most recent month. Management was disappointed, however, when the income statement for June also showed a loss. June’s income statement follows:

You must label each answer with the number of question. Each question must have at least three sentence answers. There is no maximum sentence, use as many as you wish to thoroughly answer the question. All answers must be complete sentences using proper grammar and spelling.

Sarah paid $50,000 for a franchise that covers the entire United States. She intended to sell individual franchises for the each state. Naturally, investors considering buying a franchise from her asked to see the financial statements of the business.

Believing the true value of the franchise to be $500,000. She gives the franchise to Cindy. She borrow $500,000 from the bank. She pays $500,000 to the corporation for all of the stock. The corporation then uses the $500,000 to buy the franchise from Cindy. Cindy then pays the bank loan off with the $500,000.

In the final analysis, Cindy is debt-free and out of the picture. Sarah owns all the corporation’s stock, and the corporation owns the franchise. The corporation’s balance sheet lists a franchise acquired at a cost of $500,000. This balance sheet is the most valuable marketing tool.

Requirements

1. Was this an ethical or unethical situation? Explain your reason.

2. Who can be harmed? Explain your reason.

3. How can they be harmed? Explain your reason.

4. What role does accounting play?