CHAPTER 1

THE MANAGER AND MANAGEMENT ACCOUNTING

See the front matter of this Solutions Manual for suggestions regarding your choices of
assignment material for each chapter.
1-1 Management accounting measures, analyzes and reports financial and nonfinancial
information that helps managers make decisions to fulfill the goals of an organization. It focuses
on internal reporting and is not restricted by generally accepted accounting principles (GAAP).
Financial accounting focuses on reporting to external parties such as inestors,
goernment agencies, and banks. It measures and records business transactions and proides
financial statements that are based on generally accepted accounting principles (GAAP).
!ther differences include (") management accounting emphasizes the future (not the
past), and (#) management accounting influences the behaior of managers and other employees
(rather than primarily reporting economic eents).
1-2 $inancial accounting is constrained by generally accepted accounting principles.
%anagement accounting is not restricted to these principles. &he result is that
management accounting allo's managers to charge interest on o'ners( capital to help
)udge a diision(s performance, een though such a charge is not allo'ed under GAAP,
management accounting can include assets or liabilities (such as *brand names+
deeloped internally) not recognized under GAAP, and
management accounting can use asset or liability measurement rules (such as present
alues or resale prices) not permitted under GAAP.
1-3 %anagement accountants can help to formulate strategy by proiding information about
the sources of competitie adantage,for example, the cost, productiity, or efficiency
adantage of their company relatie to competitors or the premium prices a company can charge
relatie to the costs of adding features that make its products or serices distinctie.
1-4 &he business functions in the alue chain are
Research and develo!en",generating and experimenting 'ith ideas related to ne'
products, serices, or processes.
Des#$n o% rod&c"s and rocesses,the detailed planning, engineering, and testing of
products and processes.
Prod&c"#on,procuring, transporting, storing and assembling resources to produce a
product or delier a serice.
Mar'e"#n$,promoting and selling products or serices to customers or prospectie
customers.
D#s"r#(&"#on,processing orders and shipping products or serices to customers.
C&s"o!er serv#ce,proiding after-sales serice to customers.
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1-) Supply chain describes the flo' of goods, serices, and information from the initial
sources of materials and serices to the deliery of products to consumers, regardless of 'hether
those actiities occur in the same organization or in other organizations.
.ost management is most effectie 'hen it integrates and coordinates actiities across all
companies in the supply chain as 'ell as across each business function in an indiidual
company(s alue chain. Attempts are made to restructure all cost areas to be more cost-effectie.
1-* *%anagement accounting deals only 'ith costs.+ &his statement is misleading at best,
and 'rong at 'orst. %anagement accounting measures, analyzes, and reports financial and non-
financial information that helps managers define the organization(s goals, and make decisions to
fulfill them. %anagement accounting also analyzes reenues from products and customers in
order to assess product and customer profitability. &herefore, 'hile management accounting does
use cost information, it is only a part of the organization(s information recorded and analyzed by
management accountants.
1-+ %anagement accountants can help improe /uality and achiee timely product delieries
by recording and reporting an organization(s current /uality and timeliness leels and by
analyzing and ealuating the costs and benefits,both financial and non-financial,of ne'
/uality initiaties such as &0%, relieing bottleneck constraints or proiding faster customer
serice.
1-, &he fie-step decision-making process is (") identify the problem and uncertainties (#)
obtain information (1) make predictions about the future (2) make decisions by choosing among
alternaties and (3) implement the decision, ealuate performance and learn.
1-- Planning decisions focus on selecting organization goals and strategies, predicting results
under arious alternatie 'ays of achieing those goals, deciding ho' to attain the desired goals,
and communicating the goals and ho' to attain them to the entire organization.
Control decisions focus on taking actions that implement the planning decisions, deciding
ho' to ealuate performance, and proiding feedback and learning to help future decision
making.
1-1. &he three guidelines for management accountants are
". 4mploy a cost-benefit approach.
#. 5ecognize behaioral and technical considerations.
1. Apply the notion of *different costs for different purposes+.
1-11 Agree. A successful management accountant re/uires general business skills (such as
understanding the strategy of an organization) and people skills (such as motiating other team
members) as 'ell as technical skills (such as computer kno'ledge, calculating costs of products,
and supporting planning and control decisions).
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1-12 &he ne' controller could reply in one or more of the follo'ing 'ays6
(a) 7emonstrate to the plant manager ho' he or she could make better decisions if the
plant controller 'as ie'ed as a resource rather than a dead'eight. In a related 'ay,
the plant controller could sho' ho' the plant manager(s time and resources could be
saed by ie'ing the ne' plant controller as a team member.
(b) 7emonstrate to the plant manager a good kno'ledge of the technical aspects of the
plant. &his approach may inole doing background reading. It certainly 'ill inole
spending much time on the plant floor speaking to plant personnel.
(c) 8ho' the plant manager examples of the ne' plant controller(s past successes in
'orking 'ith line managers in other plants. 4xamples could include
assistance in preparing the budget,
assistance in analyzing problem situations and ealuating financial and
nonfinancial aspects of different alternaties, and
assistance in submitting capital budget re/uests.
(d) 8eek assistance from the corporate controller to highlight to the plant manager the
importance of many tasks undertaken by the ne' plant controller. &his approach is a
last resort but may be necessary in some cases.
1-13 &he controller is the chief management accounting executie. &he corporate controller
reports to the chief financial officer, a staff function. .ompanies also hae business unit
controllers 'ho support business unit managers or regional controllers 'ho support regional
managers in ma)or geographic regions.
1-14 &he Institute of %anagement Accountants (I%A) sets standards of ethical conduct for
management accountants in the follo'ing four areas6
.ompetence
.onfidentiality
Integrity
.redibility
1-1) 8teps to take 'hen established 'ritten policies proide insufficient guidance are
(a) 7iscuss the problem 'ith the immediate superior (except 'hen it appears that the
superior is inoled).
(b) .larify releant ethical issues by confidential discussion 'ith an I%A 4thics
.ounselor or other impartial adisor.
(c) .onsult your o'n attorney as to legal obligations and rights concerning the ethical
conflicts.
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1-1* ("3 min.) /al&e cha#n and class#%#ca"#on o% cos"s0 co!&"er co!an12
Cos" I"e! /al&e Cha#n 3&s#ness 4&nc"#on
a.
b.
c.
d.
e.
f.
g.
h.
Production
7istribution
7esign of products and processes
5esearch and 7eelopment
.ustomer 8erice or %arketing
7esign of products and processes
(or 5esearch and 7eelopment)
%arketing
Production
1-1+ ("3 min.) /al&e cha#n and class#%#ca"#on o% cos"s0 har!ace&"#cal co!an12
Cos" I"e! /al&e Cha#n 3&s#ness 4&nc"#on
a.
b.
c.
d.
e.
f.
g.
h.
7esign of products and processes
%arketing
.ustomer 8erice
5esearch and 7eelopment
%arketing
Production
%arketing
7istribution
1.18 ("3 min.) /al&e cha#n and class#%#ca"#on o% cos"s0 %as" %ood res"a&ran"2
Cos" I"e! /al&e Cha#n 3&s#ness 4&nc"#on
a.
b.
c.
d.
e.
f.
g.
h.
Production
7istribution
%arketing
%arketing
%arketing
Production
7esign of products and processes (or 5esearch and 7eelopment)
.ustomer serice
1-1- ("3 min.) 5e1 s&ccess %ac"ors2
Chan$e #n Oera"#ons6
Mana$e!en" Acco&n"#n$ 5e1 7&ccess 4ac"or
a.
b.
c.
d.
e.
Innoation
.ost and 0uality
&ime
&ime and .ost
.ost
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1-2. ("9-"3 min.) Plann#n$ and con"rol dec#s#ons2
Ac"#on Dec#s#on
a.
b.
c.
d.
e.
Planning
.ontrol
.ontrol
Planning
Planning
1-21 ("3 min.) 4#ve-s"e dec#s#on-!a'#n$ rocess0 !an&%ac"&r#n$2
Ac"#on 7"e #n Dec#s#on-Ma'#n$ Process
a.
b.
c.
d.
e.
f.
g.

!btain information
%ake predictions about the future
Identify the problem and uncertainties
Implement the decision, ealuate performance, and learn
%ake predictions about the future
%ake decisions by choosing among alternaties
!btain information
1-22 ("3 min.) 4#ve-s"e dec#s#on-!a'#n$ rocess0 serv#ce %#r!2
Ac"#on 7"e #n Dec#s#on-Ma'#n$ Process
a.
b.
c.
d.
e.
f.
!btain information
Identify the problem and uncertainties
!btain information and:or make predictions about the future
%ake predictions about the future
!btain information
%ake decisions by choosing among alternaties
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1-23 ("9;"3 min.) Pro%ess#onal e"h#cs and reor"#n$ d#v#s#on er%or!ance2
". %iller(s ethical responsibilities are 'ell summarized in the I%A(s *8tandards of 4thical
.onduct for %anagement Accountants+ (4xhibit "-< of text). Areas of ethical responsibility
include the follo'ing6
competence
confidentiality
integrity
credibility
&he ethical standards related to %iller(s current dilemma are integrity, competence and
credibility. =sing the integrity standard, %iller should carry out duties ethically and
communicate unfaorable as 'ell as faorable information and professional )udgments or
opinions. .ompetence demands that %iller perform her professional duties in accordance 'ith
releant la's, regulations, and technical standards and proide decision support information that
is accurate. .redibility re/uires that %iller report information fairly and ob)ectiely and disclose
deficiencies in internal controls in conformance 'ith organizational policy and:or applicable la'.
%iller should refuse to book the >#99,999 of sales until the goods are shipped. ?oth financial
accounting and management accounting principles maintain that sales are not complete until the
title is transferred to the buyer.
#. %iller should refuse to follo' %aloney@s orders. If %aloney persists, the incident should
be reported to the corporate controller. 8upport for line management should be 'holehearted, but
it should not re/uire unethical conduct.
1-24 ("3 min.) Plann#n$ and con"rol dec#s#ons0 In"erne" co!an12
". Plann#n$ dec#s#ons
a. 7ecision to raise monthly subscription fee
c. 7ecision to upgrade content of online serices (later decision to inform subscribers
and upgrade online serices is an implementation part of control)
e. 7ecision to decrease monthly subscription fee starting in Aoember.
Con"rol dec#s#ons
b. 7ecision to inform existing subscribers about the rate of increase,an implementation
part of control decisions
d. 7ismissal of BP of %arketing,performance ealuation and feedback aspect of
control decisions
#. !ther planning decisions that may be made at CebAe's.com6 decision to raise or lo'er
adertising feesD decision to charge a fee from on-line retailers 'hen customers click-through
from CebAe's.com to the retailers( 'ebsites.
!ther control decisions that may be made at CebAe's.com6 ealuating ho' customers
like the ne' format for the 'eather information, 'orking 'ith an outside endor to redesign the
'ebsite, and ealuating 'hether the 'aiting time for customers to access the 'ebsite has been
reduced.
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1-2) (#9 min.) 7"ra"e$#c dec#s#ons and !ana$e!en" acco&n"#n$2
". &he strategies the companies are follo'ing in each case are6
a.
b.
c.
d.
Fo' price strategy
7ifferentiated product strategy
Fo' price strategy
7ifferentiated product strategy
#. 4xamples of information the management accountant can proide for each strategic decision
follo'.
a.


b.


c.

d.
.ost to manufacture and sell the cell phone
Productiity, efficiency and cost adantages relatie to competition
Prices of competitie cell phones
8ensitiity of target customers to price and /uality
&he production capacity of 5oger Phones and its competitors
.ost to deelop, produce and sell ne' soft'are
Premium price that customers 'ould be 'illing to pay due to product uni/ueness
Price of basic soft'are
Price of closest competitie soft'are
.ash needed to deelop, produce and sell ne' soft'are
.ost of producing the *store-brand+ lip gloss
Productiity, efficiency and cost adantages relatie to competition
Prices of competitie products
8ensitiity of target customers to price and /uality
Go' the market for lip gloss is gro'ing
.ost to produce and sell ne' line of gourmet bologna
Premium price that customers 'ould be 'illing to pay due to product uni/ueness
Price of basic meat product
Price of closest competitie product
1-2* ("3 min.) Mana$e!en" acco&n"#n$ $&#del#nes2
". .ost-benefit approach
#. ?ehaioral and technical considerations
1. 7ifferent costs for different purposes
2. .ost-benefit approach
3. ?ehaioral and technical considerations
E. .ost-benefit approach
<. ?ehaioral and technical considerations
H. 7ifferent costs for different purposes
I. ?ehaioral and technical considerations
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1-2+ ("3 min.) Role o% con"roller0 role o% ch#e% %#nanc#al o%%#cer2
".
Ac"#v#"1 Con"roller C4O
%anaging accounts payable J
.ommunicating 'ith inestors J
8trategic reie' of different lines of businesses J
?udgeting funds for a plant upgrade J
%anaging the company(s short-term inestments J
Aegotiating fees 'ith auditors J
Assessing profitability of arious products J
4aluating the costs and benefits of a ne' product design J
#. As .$!, Perez 'ill be interacting much more 'ith the senior management of the
company, the board of directors, auditors, and the external financial community. Any experience
he can get 'ith these aspects 'ill help him in his ne' role as .$!. George Perez can be better
positioned for his ne' role as .$! by participating in strategy discussions 'ith senior
management, by preparing the external inestor communications and press releases under the
guidance of the current .$!, by attending courses that focus on the interaction and negotiations
bet'een the arious business functions and outside parties such as auditors and, either formally
or on the )ob, getting training in issues related to inestments and corporate finance.
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1-2, (19 min.) Phar!ace&"#cal co!an10 (&d$e"#n$0 e"h#cs2
". &he oerarching principles of the I%A 8tatement of 4thical Professional Practice are
Gonesty, $airness, !b)ectiity and 5esponsibility. &he statement(s corresponding *8tandards for
4thical .onductK+ re/uire management accountants to
Perform professional duties in accordance 'ith releant la's, regulations, and
technical standards.
5efrain from engaging in any conduct that 'ould pre)udice carrying out duties
ethically.
.ommunicate information fairly and ob)ectiely.
7isclose all releant information that could reasonably be expected to influence an
intended user(s understanding of the reports, analyses, or recommendations.
&he idea of capitalizing some of the company(s 5L7 expenditures is a direct iolation of the
I%A(s ethical standards aboe. &his transaction 'ould not be *in accordance 'ith releant la's,
regulations, and technical standards+. Generally Accepted Accounting Principles re/uire research
and deelopment costs to be expensed as incurred. 4en if Mohnson beliees his transaction is
)ustifiable, it iolates the profession(s technical standards and 'ould be unethical.
&he other *year-end+ actions occur in many organizations and fall into the *gray+ to
*acceptable+ area. %uch depends on the circumstances surrounding each one, ho'eer, such as
the follo'ing6
a. Stop all research and development eforts on the drug Lyricon until
after year-end. This change would delay the drug going to market
by at least six months. It is also possible that in the meantime a
harma!or competitor could make it to market with a similar drug.
Chile this solution may sole the budget short-fall in this year, it could result in a
significant loss of future profits for Pharma.or in the long-run, especially if a
competitor is able to obtain a patent on a similar drug before Pharma.or.
b. Sell off rights to the drug, Markapro. The company had not planned on doing this
because, under current market conditions, it would get less than fair alue. !t would,
howeer, result in a onetime gain that could offset the budget short-fall. "f course, all
future profits from Markapro would be lost. Again, this solution may sole the
company(s short-term budget crisisD but could result in the loss of future profits for
Pharma.or in the long-run.
#. Chile it is not uncommon for companies to sacrifice long-term profits for short-term
gains, it may not be in the best interest of the company(s shareholders. In the case of Pharma.or,
the .$! is primarily concerned 'ith *maximizing shareholder 'ealth+ in the immediate future
(third /uarter only), but not in the long-term. ?ecause this executie(s incentie pay and een
employment may be based on his ability to meet short-term targets, he may not be acting in the
best interest of the shareholders in the long-run.
Mohnson definitely faces an ethical dilemma. It is not unethical on Mohnson(s part to 'ant
to please his ne' boss, nor is it unethical that Mohnson 'ants to make a good impression on his
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first days at his ne' )obD ho'eer, Mohnson must still act 'ithin the ethical standards re/uired by
his profession. &aking illegal and:or unethical action by capitalizing 5L7 to satisfy the demands
of his ne' superisor, Mames .lark, is unacceptable. Although not strictly unethical, I 'ould
recommend that Mohnson not agree to slo' do'n the 5L7 efforts on Fyricon or sell off the
rights to %arkapro. 4ach of these appears to sacrifice the oerall economic interests of
Pharma.or for short-run gain. Mohnson should argue against doing this but not resign if .lark
insists that these actions be taken. If, ho'eer, .lark asks Mohnson to capitalize 5L7, he should
raise this issue 'ith the chair of the Audit .ommittee after informing .lark that he is doing so. If
the .$! still insists on Mohnson capitalizing 5L7, he should resign rather than engage in
unethical behaior.
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1-2- (19;29 min.) Pro%ess#onal e"h#cs and end-o%-1ear ac"#ons2
". &he possible motiations for the snack foods diision 'anting to take end-of-year actions
include6
(a) %anagement incenties. Gourmet $oods may hae a diision bonus scheme based on
one-year reported diision earnings. 4fforts to front-end reenue into the current year
or transfer costs into the next year can increase this bonus.
(b) Promotion opportunities and )ob security. &op management of Gourmet $oods likely
'ill ie' those diision managers that delier high reported earnings gro'th rates as
being the best prospects for promotion. 7iision managers 'ho delier *un'elcome
surprises+ may be ie'ed as less capable.
(c) 5etain diision autonomy. If top management of Gourmet $oods adopts a
*management by exception+ approach, diisions that report sharp reductions in their
earnings gro'th rates may attract a sizable increase in top management superision.
#. &he *8tandards of 4thical .onduct . . . + re/uire management accountants to
Perform professional duties in accordance 'ith releant la's, regulations, and
technical standards.
5efrain from engaging in any conduct that 'ould pre)udice carrying out duties
ethically.
.ommunicate information fairly and ob)ectiely.
8eeral of the *end-of-year actions+ clearly are in conflict 'ith these re/uirements and should be
ie'ed as unacceptable by &aylor.
(b) &he fiscal year-end should be closed on midnight of 7ecember 1". *4xtending+ the
close falsely reports next year(s sales as this year(s sales.
(c) Altering shipping dates is falsification of the accounting reports.
(f) Adertisements run in 7ecember should be charged to the current year. &he
adertising agency is facilitating falsification of the accounting records.
&he other *end-of-year actions+ occur in many organizations and fall into the *gray+ to
*acceptable+ area. Go'eer, much depends on the circumstances surrounding each one, such as
the follo'ing6
(a) If the independent contractor does not do maintenance 'ork in 7ecember, there is no
transaction regarding maintenance to record. &he responsibility for ensuring that
packaging e/uipment is 'ell maintained is that of the plant manager. &he diision
controller probably can do little more than obsere the absence of a 7ecember
maintenance charge.
(d) In many organizations, sales are heaily concentrated in the final 'eeks of the fiscal
year-end. If the double bonus is approed by the diision marketing manager, the
diision controller can do little more than obsere the extra bonus paid in 7ecember.
(e) If &B spots are reduced in 7ecember, the adertising cost in 7ecember 'ill be
reduced. &here is no record falsification here.
(g) %uch depends on the means of *persuading+ carriers to accept the merchandise. $or
example, if an under-the-table payment is inoled, or if carriers are pressured to
accept merchandise, it is clearly unethical. If, ho'eer, the carrier receies no extra
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consideration and 'illingly agrees to accept the assignment because it sees potential
sales opportunities in 7ecember, the transaction appears ethical.
4ach of the (a), (d), (e), and (g) *end-of-year actions+ may 'ell disadantage Gourmet $oods in
the long run. $or example, lack of routine maintenance may lead to subse/uent e/uipment
failure. &he diisional controller is 'ell adised to raise such issues in meetings 'ith the diision
president. Go'eer, if Gourmet $oods has a rigid set of line:staff distinctions, the diision
president is the one 'ho bears primary responsibility for )ustifying diision actions to senior
corporate officers.
1. If &aylor beliees that 5yan 'ants her to engage in unethical behaior, she should first
directly raise her concerns 'ith 5yan. If 5yan is un'illing to change his re/uest, &aylor should
discuss her concerns 'ith the .orporate .ontroller of Gourmet $oods. 8he could also initiate a
confidential discussion 'ith an I%A 4thics .ounselor, other impartial adiser, or her o'n
attorney. &aylor also may 'ell ask for a transfer from the snack foods diision if she perceies
5yan is un'illing to listen to pressure brought by the .orporate .ontroller, .$!, or een
President of Gourmet $oods. In the extreme, she may 'ant to resign if the corporate culture of
Gourmet $oods is to re'ard diision managers 'ho take *end-of-year actions+ that &aylor ie's
as unethical and possibly illegal. It 'as precisely actions along the lines of (b), (c), and (f) that
caused ?etty Binson, an accountant at Corld.om to be indicted for falsifying Corld.om(s books
and misleading inestors.
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1-30 (19 min.) Pro%ess#onal e"h#cs and end-o%-1ear ac"#ons2
". &he possible motiations for .ontroller, &odd Allen to modify the diision(s year-end
earnings are6
(i) Mob security and promotion. &he company(s .$! 'ill likely re'ard him for meeting the
company(s performance expectations. Alternately, the Allen may be penalized, perhaps
een by losing his )ob if the performance expectations are not met.
(ii) %anagement incenties. Allen(s bonus may be based on the diision(s ability to meet
certain profit targets. If the .onsumer Products diision has already met its profit target
for the year, the .ontroller may personally benefit if ne' printing e/uipment is sold off
and replaced 'ith the discarded e/uipment that no longer meets current safety standards,
or if operating income is manipulated by /uestionable reenue and:or expense
recognition.
#. &he oerarching principles of the I%A 8tatement of 4thical Professional Practice are
Gonesty, $airness, !b)ectiity and 5esponsibility. &he statement(s corresponding *8tandards for
4thical .onductK+ re/uire management accountants to
Perform professional duties in accordance 'ith releant la's, regulations, and technical
standards.
5efrain from engaging in any conduct that 'ould pre)udice carrying out duties
ethically.
.ommunicate information fairly and ob)ectiely.
7isclose all releant information that could reasonably be expected to influence an
intended user(s understanding of the reports, analyses, or recommendations.
8eeral of the *year-end+ actions are clearly are in conflict 'ith the statement(s principles and
re/uired standards and should be ie'ed as unacceptable.
(c) 8ubscription reenue receied in 7ecember in adance for magazines that 'ill be sent
out in Manuary is a liability. 8ho'ing it as reenue falsely reports next year(s reenue as
this year(s reenue.
(d) 5eersing the diision(s Allo'ance for ?ad 7ebt 4xpense 'ould iolate Generally
Accepted Accounting Principles unless the bad debt allo'ance is currently oerstated.
5ecording this transaction 'ould result in an oerstatement of income and could
potentially mislead inestors.
(e) ?ooking adertising reenues that relate to Manuary in 7ecember falsely reports next
year(s reenue as this year(s reenue.
&he other *year-end+ actions occur in many organizations and fall into the *gray+ to *acceptable+
area. %uch depends on the circumstances surrounding each one, ho'eer, such as the follo'ing6
(a) Cancelling two of the diision#s least profitable maga$ines, resulting in the layoff of
twenty-fie employees. Chile employee layoffs may be necessary for the business to
surie, the layoff decision could result in economic hardship for those employees 'ho
lose their )obs, as 'ell as result in employee morale problems for the rest of the diision.
%ost companies 'ould prefer to aoid causing hardship for their existing employees due
to layoffs unless absolutely necessary for the surial of the business as a 'hole.
(b) Selling the new printing e%uipment that was purchased in &anuary and replacing it with
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discarded e%uipment from one of the company#s other diisions. The preiously
discarded e%uipment no longer meets current safety standards. Again, 'hile this method
may result in a short-term solution for the .ontroller and the Production %anager
personally, this decision may actually harm the corporation financially as a 'hole, not to
mention the potential resulting in)uries to production 'orkers from hazardous e/uipment.
&his method 'ould be also be ethically /uestionable and 'ould likely iolate the I%A(s
ethical standards of integrity and credibility.
(f) Switching from declining balance to straight line depreciation to reduce depreciation
e'pense in the current year. %any companies s'itch their depreciation policy from one
method to another. 7eacon Publishing could argue that straight-line depreciation better
represents the decrease in the economic alue of the asset compared to the declining
balance method. 8traight-line depreciation may also be more in line 'ith 'hat its
competitors do. If, ho'eer, the company changes to straight-line depreciation 'ith the
sole purpose of reducing expenses to meet its profit goals, such behaior 'ould be
unacceptable. &he 8tandards of 4thical ?ehaior re/uire management accountants to
communicate information fairly and ob)ectiely and to carry out duties ethically.
1. Allen should directly raise his concerns first 'ith the .$!, especially if the pressure from
the .$! is so great that the only course of action on the part of the controller is to other'ise
behae unethically. If the .$! refuses to change his direction, then the controller should raise
these issues 'ith the .4!, and next to the Audit .ommittee and the ?oard of 7irectors, after
informing the .$! that he is doing so. &he .ontroller could also initiate a confidential
discussion 'ith an I%A 4thics .ounselor, other impartial adiser, or his:her o'n attorney. In the
extreme, the .ontroller may 'ant to resign if the corporate culture of 7eacon Publishing is to
re'ard executies 'ho take year-end actions that the .ontroller ie's as unethical and possibly
illegal. It 'as precisely actions along the lines of (c), (d) and (e) that caused ?etty Binson, an
accountant at Corld.om, to be indicted for falsifying Corld.om(s books and misleading
inestors.
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1-31 (29 min.) Glo(al co!an10 e"h#cal challen$es2
". &he oerarching principles of the I%A 8tatement of 4thical Professional Practice are
Gonesty, $airness, !b)ectiity and 5esponsibility. &he statement(s corresponding *8tandards for
4thical .onductK+ re/uire management accountants to
Perform professional duties in accordance 'ith releant la's, regulations, and technical
standards.
5efrain from engaging in any conduct that 'ould pre)udice carrying out duties
ethically.
.ommunicate information fairly and ob)ectiely.
7isclose all releant information that could reasonably be expected to influence an
intended user(s understanding of the reports, analyses, or recommendations.
8eeral of the suggestions made by Gamsen(s staff are clearly in conflict 'ith the statement(s
principles and re/uired standards and should be ie'ed as unacceptable.
c. Pressure current customers to take early deliery of goods before the end of the year so
that more reenue can be reported on this year#s financial statements. &his tactic,
commonly kno'n as channel stuffing, merely results in shifting future period reenues
into the current period. &he oerstatement of reenue in the current period may mislead
inestor(s to beliee that the company(s financial 'ell being is better than the actual
results achieed. &his practice 'ould iolate the I%A(s standards of credibility and
integrity. .hannel stuffing is fre/uently considered a fraudulent practice.
e2 (ecord the e'ecutie year-end bonus compensation for the current year in the ne't year
when it is paid until after the )ecember fiscal year-end. Generally Accepted
Accounting Principles re/uires expenses to be recorded (accrued) 'hen incurred, not
'hen paid (cash basis accounting). &herefore, failure to record the executies( year-
end bonus 'ould iolate the I%A(s standards of credibility and integrity.
%2 (ecogni$e sales reenues on orders receied, but not shipped as of the end of the year.
Generally Accepted Accounting Principles re/uires income to be recorded (accrued)
'hen the four criteria of reenue recognition hae been met6
12 &he company has completed a significant portion of the production and sales
effort.
22 &he amount of reenue can by ob)ectiely measured.
32 &he ma)or portion of the costs has been incurred, and the remaining costs can be
reasonably estimated.
42 &he eentual collection of the cash is reasonably assured.
?ecause criteria " and 1 hae not been met at the time the order is placed the reenue should not
be recognized until after year-end. &herefore, recording next year(s reenue in the current year
'ould be a iolation of Generally Accepted Accounting Principles and 'ould be falsifying
reenue. &his 'ould be a iolation of the I%A(s standards of credibility and integrity and may
be considered fraudulent.
&he other *year-end+ actions occur in many organizations and fall into the *gray+ to *acceptable+
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area. %uch depends on the circumstances surrounding each one, ho'eer, such as the follo'ing6
a2 Stop all transatlantic shipping efforts. The start-up costs for the new operations are
hurting current profit margins. Chile this method may result in better short-term
financial results for ?redahl, it may do harm to the long-term financial condition of the
corporation as a 'hole.
(2 Make deep cuts in pricing through the end of the year to generate additional reenue.
Again, this is only a short-term tactic to improe this year(s financial results. Inestors
may be content in the short-run, but in the long run the ne' shipping company 'ill see
reduced margins from these actions.
d. Sell-off distribution e%uipment prior to year-end. The sale would result in one-time
gains that could offset the company#s lagging profits. The owned e%uipment could be
replaced with leased e%uipment at a lower cost in the current year. Chile this course of
action does not necessarily iolate the I%A(s code of ethical standards, it may be only a
short-term tactic to improe this year(s financial results. Gamsen 'ill need to 'eigh
his options long-term to make the most cost effectie decision for his company.
$2 *stablish corporate head%uarters in !reland before the end of the year, lowering the
company#s corporate ta' rate from +,- to .+./-. Gamsen may hae other legitimate
reasons for relocating his company to Ireland, but doing so only to reduce his tax
liability 'ould likely be considered an easion of taxes in the company(s home country.
Gamsen should seek the adice of skilled consultants in the area of international tax
before making any such moe. &he company could face large fines and een criminal
charges for eading corporate income taxes of the home country.
2. It is possible that any of the *year-end+ actions that fall into the *gray+ area may be good
for inestors, depending on the credible eidence 'hich supports the management decision. $or
example, replacing o'ned e/uipment 'ith leased e/uipment may result in both short-term gains
for the company and long-term cost reduction. If so, this decision 'ould be in the best interest of
the inestors. If the decision only results in short-term gains, but higher costs in the long-run,
then the decision may not be in the best long-term interest of the company(s inestors and should
not be implemented solely to prop up short-term earnings.
&hose decisions that clearly iolate the I%A code of ethical standards (c, e, and f) 'ould
neer be in the best interest of the inestor. &hese options 'ould result in misleading financial
statements and could result in the demise of the company or een in criminal charges, as 'as the
case 'ith companies such as 4nron and Corld.om. If Gamsen asks the management accountant
to take any of the actions that are clearly unethical, he should raise this issue 'ith the chair of the
Audit .ommittee after informing Gamsen that he is doing so. If Gamsen still insists on the
management accountant taking these actions, he should resign rather than engage in unethical
behaior.
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