ethics for accounting

1- Ethics at Enron

Watch the movie Enron: The Smartest Guys in the Room (Magnolia Home Entertainment, 2005, Los Angeles, California).

Basic Discussion Questions

1. Do you think such behavior is common at other companies, or do you think this was a fairly isolated event?
2. How important is the “tone at the top” (the tone set by company leadership)?
3. Do you think you could be tempted to follow along if the leadership at your company had the same mentality as the leadership at Enron, or do you think you would have the courage to “just say no” or even be a “whistle-blower”?
4. Why do you think some people can so easily justify (at least to themselves) their unethical behavior?
5. In general, do you think people stop to think about how their actions will affect other people (e.g., the elderly in California who suffered due to electricity blackouts) or do they just “do their job”?
6. What was your reaction to the psychology experiment shown in the DVD? Studies have shown that unlike the traders at Enron (who received large bonuses), most employees really have very little to gain from following a superior’s directive to act unethically. Why then do some people do it?
7. Do you think people weigh the potential costs of acting unethically with the potential benefits?
8. You are a business student and will someday work for a company or own a business. How will watching this movie impact the way you intend to conduct yourself as an employee or owner?
9. The reporter from Fortune magazine asked the question, “How does Enron make its money?” Why should every employee and manager (at every company) know the answer to this question?
10. In light of the “mark-to-market” accounting that enabled Enron to basically record any profit it wished to record, can you understand why some of the cornerstones of financial accounting are “conservatism” and “recording transactions at historical cost”?
11. How did employees of Enron (and employees of the utilities company in Oregon) end up losing billions in retirement funds?

2- Ethics involved with assigning costs to inventory (Learning Objectives 4 & 5)

Brandon is the production manager of a large manufacturing firm. He is worried about the prospect of bonuses for the upcoming year. The company has paid out bonuses for the past ten years, so Brandon has been counting on the bonus to help pay some debts he has accumulated over the year. In addition, Brandon and his wife are expecting their first baby in two months. Due to the unexpected downturn in sales, bonuses appear to be unlikely this year.

Ryan is the accounting manager for the company. He and Brandon are good friends. Over lunch one day, Brandon confides in Ryan about his financial difficulties. He is stressed out over the bills and the baby on the way. He really needs that bonus.

Ryan wants to help Brandon. Ryan has been with the company for many years and knows that fundamentally the company is strong. This year is just an unusual year. He thinks about ways that he can help Brandon. Brandon is a good employee, and the company does not want to lose him if he were to go to work for a competitor.

Ryan thinks about how he can best help Brandon. He thinks about a few different options, including the following:

• Option #1: Ryan could increase income for the year by adding sales commission costs and advertising costs to the products. If he does this, the product cost will be higher. However, there is still a large inventory of units on hand. The units that are still in ending inventory will shield these costs from decreasing net income until the units are sold in a future year.
• Option #2: Ryan could quietly make Brandon a loan from the company to help him get back on his feet. The company does not have a policy prohibiting loans to employees, but neither does it have a policy of allowing such loans to employees.

Ryan does not know what to do.

Requirements

Using the IMA Statement of Ethical Professional Practice as an ethical framework, answer the following questions:

1. If Ryan were to increase income by adding sales commission costs and advertising costs to product costs as described in Option #1, what ethical principles would be violated?
2. If Ryan were to make a company loan to Brandon (Option #2), what, if any, ethical principles would be violated?
3. What do you think Ryan should do in this situation?

3-

Ethics involved with choice of cost driver (Learning Objectives 2, 3, & 4)

Vicki Thornton is the controller for Jackson Manufacturing. It is a small company that manufactures plastic lumber and is run by the owner and CEO, Franklin Jackson. At the end of the year, Jackson is reviewing the projected operating income for the company for the year. He tells Thornton that the projected operating income is too low; if operating income is not at least $250,000, no holiday bonuses will be paid to employees, including Thornton.

Hoping to find an error, Thornton first rechecks the projected financial statements; she finds no errors. Since cost of goods sold is a large portion of Jackson’s expenses, she next analyzes the components of cost of goods sold. The amount of direct material used ties directly to the physical inventory count, so there are no errors there. The direct labor dollars also tie directly to the payroll reports, eliminating another potential source of errors. She then looks at the way manufacturing overhead has been allocated to products.

Traditionally, manufacturing overhead has been allocated to products based on direct labor hours because the manufacturing process for plastic lumber is labor intensive. Thornton calculates manufacturing overhead based on machine hours used and finds that cost of goods sold will be $55,000 lower if manufacturing overhead is allocated based on machine hours rather than direct labor hours. The $55,000 difference, if booked, would cause net income to be $262,000, which means that bonuses would be paid to all employees. Thornton knows that several factory employees are struggling and the holiday bonus would be much appreciated. In addition, Thornton herself feels that she has earned the bonus over the past year because she has helped to implement several cost savings programs and has worked many long days without overtime pay.

Requirements

1. Using the IMA Statement of Ethical Professional Practice as an ethical framework, answer the following questions:
   1. What is(are) the ethical issue(s) in this situation?
   2. What are Thornton’s responsibilities as a management accountant?
2. Discuss the specific steps Thornton should take to resolve the situation. Refer to the IMA Statement of Ethical Professional Practice in your response.

4-

1. Ethics involved with ABC and hazardous waste costs (Learning Objectives 2 & 3)Sparkle Unlimited is a costume jewelry manufacturer located in the United States that uses electroplating. Electroplating is a process that involves applying a decorative metal coating to a base metal. The electroplating solution, or the water that is used in this process, becomes dirty over time and needs to be replaced. This used solution for electroplating is referred to as “spent” solution.The spent solution contains dissolved metals such as gold, silver, platinum, copper, and other metals. Cyanide can also be present in the spent solution. Because of this content, spent solution is considered to be hazardous waste. This waste is more expensive to dispose of than regular waste.Currently, Sparkle is using a traditional, volume-based costing system for its jewelry. Total manufacturing overhead for the period is allocated to the jewelry based on machine hours used.Recently hired, Jacob is the controller for Sparkle. He previously worked at a manufacturer that produced custom furniture. At this prior job, he implemented an activity-based costing system that helped the company to determine the profitability of different product lines. He has been learning about Sparkle’s operations and thinks activity-based costing might be a good tool for Sparkle’s management to use to help to manage its operations.Jacob’s good friend, Michelle, is the division manager for the Silver line of jewelry at Sparkle. She runs an efficient production line and has earned bonuses for each of the past several years based on her division’s productivity and profitability. Division managers are evaluated based on profits generated by their divisions as calculated by the internal reporting system.If activity-based costing is used to allocate costs and hazardous waste costs are allocated to the products that generate spent solutions, the calculated internal profit from the Silver product line will decrease significantly. This decrease in profitability is because the cost of handling the spent solution is quite high, and this cost would be directly assigned to the Silver line if activity-based costing were to be used.Michelle takes Jacob out to lunch at an expensive restaurant and steers the conversation toward the upcoming activity-based costing implementation. She is concerned that her division’s profits will decrease due to the spent-solution costs charged to her division. Michelle asks Jacob if he can reduce the amount of hazardous waste costs allocated to her line.Jacob values the working relationship he has with Michelle. She is one of the people who has input on his evaluation when it comes time for raises and promotions. He wants to keep her happy.As a result, Jacob does not set up any cost pool for hazardous waste-disposal costs. Since the hazardous waste cost has always been part of the manufacturing process, he will continue to bury it in the other cost pools. His reasoning is that the activity-based costing system with hazardous waste-removal cost buried is still better than the traditional cost system; other costs are properly allocated and the costs are much more accurate than under the old system. He feels that no one is getting hurt. Since the activity-based costing cannot be used for external reporting, Jacob feels that what he is doing is not illegal.RequirementsUsing the IMA Statement of Ethical Professional Practice (Exhibit 1-7) as an ethical framework, answer the following questions:
   1. What is(are) the ethical issue(s) in this situation?
   2. Activity-based costing cannot be used for external financial reporting. Does this fact influence your analysis of whether Jacob has violated any ethical principles? Why or why not?
   3. Do you agree that no one is hurt by the burying of the hazardous waste costs into general cost pools? Explain.
   4. What are Jacob’s responsibilities as a management accountant? What should he do now?

REAL LIFE

SUSTAINABILITY