Granger Stokes, managing partner of the venture capital firm of Halston and Stok
ID: 2489432 • Letter: G
Question
Granger Stokes, managing partner of the venture capital firm of Halston and Stokes, was dissatisfied with the top management of PrimeDrive, a manufacturer of computer disk drives. Halston and Stokes had invested $20 million in PrimeDrive, and the return on their investment had been unsatisfactory for several years. In a tense meeting of the board of directors of PrimeDrive, Stokes exercised his firm's rights as the major equity investor in PrimeDrive and fired PrimeDrive's chief executive officer (CEO). He then quickly moved to have the board of directors of PrimeDrive appoint himself as the new CEO.
Stokes prided himself on his hard-driving management style. At the first management meeting, he asked two of the managers to stand and fired them on the spot, just to show everyone who was in control of the company. At the budget review meeting that followed, he ripped up the departmental budgets that had been submitted for his review and yelled at the managers for their “wimpy, do nothing targets.” He then ordered everyone to submit new budgets calling for at least a 40% increase in sales volume and announced that he would not accept excuses for results that fell below budget.
Keri Kalani, an accountant working for the production manager at PrimeDrive, discovered toward the end of the year that her boss had not been scrapping defective disk drives that had been returned by customers. Instead, he had been shipping them in new cartons to other customers to avoid booking losses. Quality control had deteriorated during the year as a result of the push for increased volume, and returns of defective TRX drives were running as high as 15% of the new drives shipped. When she confronted her boss with her discovery, he told her to mind her own business. And then, to justify his actions, he said, “All of us managers are finding ways to hit Stokes's targets.”
Questions:
1. Is the company using the budgets as a tool for planning and control?
2. What are the behavioral consequences of the way the company is using the budgets?
3. What should the staff accountant do?
Explanation / Answer
1. The company is not using budegts as a tool for planning and control . The kind od pressure from CEO to make sales targets at +40% does not have any business logic. The sales growth depends on a lot of factors and cannot be budgeted without considering ground realities. The sales growth is not the ultimate target of a company , the ultimate target is to maximize returnm from investments. When the whole budget is framed around fixed sales target given by top level , there is no scope of feedback or incorporation of actual business situations in the budget. To accomodate the sales target all the responsibel managers will give fictitious inputs and use all the means to inflate sales figure. This is nowhere a budget used as a tool for planning.
2.
As the budget is being prepared by the target set up by the CEO and the CEO has shown the way he wants to manage the the compnay, obviously the managers will be under presuure to deliver the sales target by any means to save their job. This will result is unethical ways adopted by managers to inflate the sale. One example has been given in the exercise. There may be many such incidents of managing revenues by showing next period sales as current period, bending defective items to customers, dumping of goods to customers when there is no demand , playing with numbers etc. As a result the true revenue will get hit, the qualty will come down, market reputation will be at stake, the profitability will nosedive, the internal control measures will be compromised and the overall corporate givernance will go for a toss.
3. The staff accountnat should put the findings before the CFO to keep the records straight. As an accountant it is her responsibility to flag anything that goes against the ineterst of the company.
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