The management of the Auto Parts Division of the Santana Corporation receives a
ID: 349425 • Letter: T
Question
The management of the Auto Parts Division of the Santana Corporation receives a bonus if the division's income achieves a specific target. For 2013 the target will be achieved by a wide margin. Mary Beth Williams, the controller of the division, has been asked by Philip Stanton, the head of the division's management team, to try to reduce this year's income and "bank" some of the profits for future years. Mary Beth suggests that the division's bad debt expense as a percentage of net credit sales for 2013 be increased from 3% to 5%. She believes that 3% is the more accurate estimate but knows that both the corporation's internal auditors as well as the external auditors allow some flexibility when estimates are involved. Does Mary Beth's proposal present an ethical dilemma?
Required:
Step 1: Determine the facts of the situation. This involves determining the who, what, where, when, and how.
Step 2: Identify the ethical issue and the stakeholders. Stakeholders may include shareholders, creditors, management, employees, and the community.
Step 3: Identify the values related to the situation. For example, in some situations confidentiality may be an important value that may conflict with the right to know.
Step 4: Specify the alternative courses of action.
Step 5: Evaluate the courses of action specified in step 4 in terms of their consistency with the values identified in step 3. This step may or may not lead to a suggested course of action.
Step 6: Identify the consequences of each possible course of action. If step 5 does not provide a course of action, assess the consequences of each possible course of action for all of the stakeholders involved.
Step 7: Make your decision and take any indicated action.
Explanation / Answer
Step 1- Facts of the case: The bonus for manager of Auto parts division is driven by the achievement of targets. Targets for this year have already been met. The head of management Philip wishes to defer some of this year’s income to next year so that they can get their bonuses in next reporting periods as well. Philip has asked Mary, division controller to do this job. Mary suggests increasing the bad debt percentage of net credit sales to 5% from 3% to defer the income to future periods. However, by doing this, controlled would probably mislead the readers of financial statements as net receivables would increase while decreasing net income.
Step 2: The Ethical Issue and the Stakeholders: Stakeholders are: Mary, Philip, Other division managers, an Entire Executive team of Santana Corporation, investors (internal and external), auditors, creditors.
Mary’s job requires her to prepare a financial statement which is true in nature and without any fudging of numbers. The ethical issue is her obligation to please the management to provide for future bonuses over preparing correct financial statements. The financial statements made by her can mislead the readers/users of statements.
Step 3 - Values: The values, in this case, are Honesty, Integrity, Competence, Righteousness, Loyalty to company and management, Courage, Accountability to users of financial statements.
Step 4- Mary has following alternatives:
Step 5- Evaluation of Alternatives in Terms of Values:
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