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Chapter 01 - Cost Management and Strategy
1-52 Strategy: Cost-Cutting in the Pharmaceutical Industry (15 min)
Valeant operates in the pharmaceutical industry, an industry that is known
for its reliance on innovation, attention to safety, and customer confidence
rather than cost-reduction. This is true for manufacturers of generic drugs
as well as companies the manufacturer patented medicines. Companies in
the pharmaceutical industry are typically differentiators as a result. In
contrast, it appears that Valeant has chosen a cost leadership strategy, and
this has worked well for them so far. What Valeant does is to purchase a
pharmaceutical company with successful products, and then remove the
research and development programs at these firms, to increase profits in
the short term. The question is whether the cost leadership strategy will
continue to work, in an industry that is dominated by differentiation. Risks
for Valeant in using the cost leadership strategy include potential conflict
with the Food and Drug Administration (FDA) which oversees the industry.
Valeant’s foot dragging on clinical trials and its delays in responding to FDA
concerns could lead to legal actions against the firm.
As a reporter for ProPublica (an independent newsroom) indicates, “Wall
Street loves companies that live fast and run thin. Some flourish, but many
die young. It’s not clear yet where Valeant will end up.”
Jesse Eisinger, “Valeant’s Cost-Cutting Ethos May Yet Give Wall Street
Indigestion,” The New York Times, July 31, 2014, p B6; see also, David
Geller, “Botox Maker Allergran Sues Valeant and Ackman, Claiming Insider
Trading,” The New York Times, August 2, 2014, p B2.
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Chapter 01 - Cost Management and Strategy
1-53 Different Professional Certification Programs (15 min)
The answers will vary depending on the student’s career interests. Below
is listed the summarized content of the two exams taken from the web
sites.
The CPA Exam has four parts:
Auditing and Attestation (AUD). This section covers knowledge of
auditing procedures, generally accepted auditing standards and other
standards related to attest engagements, and the skills needed to apply
that knowledge.
Business Environment and Concepts (BEC). This section covers
knowledge of general business environment and business concepts that
candidates need to know in order to understand the underlying business
reasons for and accounting implications of business transactions, and the
skills needed to apply that knowledge.
Financial Accounting and Reporting (FAR). This section covers
knowledge of generally accepted accounting principles for business
enterprises, not-for-profit organizations, and governmental entities, and the
skills needed to apply that knowledge.
Regulation (REG). This section covers knowledge of federal taxation,
ethics, professional and legal responsibilities, and business law, and the
skills needed to apply that knowledge.
The AICPA offers the CPA certificate in conjunction with the states Boards
of Accountancy. In addition to the CPA certificate, the AICPA is offers, in
partnership with the Chartered Institute of Management Accountants
(CIMA, UK), the Chartered Global Management Accountant (CGMA)
certificate which is patterned in part after the CIMA’s Certificate in Business
Accounting.
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Chapter 01 - Cost Management and Strategy
1-53 (continued -1)
The CMA Exam has two parts
(http://www.imanet.org/cma-certification/become-a-cma/become-a-cma-
overview):
Financial Planning, Performance and Control
Planning, Budgeting, and Forecasting
Performance Management
Cost Management
Internal Controls
Professional Ethics
Financial Decision Making
Financial Statement Analysis
Corporate Finance
Decision Analysis and Risk Management
Investment Decisions
Professional Ethics
The CMA Program has the following objectives, as explained on the IMA
website:
“The CMA is the globally recognized, advanced-level credential appropriate
for accountants and financial professionals in business. Achieving the CMA
demonstrates your professional expertise in financial planning, analysis,
control, decision support, and professional ethics – skills that are in
demand by organizations around the world.”
1-43
Education.
Chapter 01 - Cost Management and Strategy
1-54 Learning About Different Professional Organizations; Using the
Internet (40 min)
The following sets out a number of key aspects of the different
organizations:
Organization Publications Training Other
Society of
Management
Accounts – Canada
CMA Management
magazine
Strategic Leadership
news tabloid
Management
Accounting Standards
Executive program
for senior managers
conferences
technical
committees
Certificate program
-- the CMA
(Canada)
Strategic
Leadership
Program (for CMAs)
Chartered Institute of
Management
Accountants
Financial
Management
magazine
on-line courses and
in-company courses
conferences
technical
committees
Programs for
colleges and
universities –
Learning through
partnership;
Accreditation
through partnership
The Chartered
Management
Accountant
program
recruitment mall
American Institute of
Certified Public
Accountants
Journal of
Accountancy
magazine
accounting and
auditing standards
code of professional
ethics
conferences
courses
technical
committees
CPA certificate
affinity program
Center for
Excellence in
Financial
Management
Web Trust
Classifieds
CGMA Certification
(partnership with
CIMA)
Institute of
Management
Accounting
Strategic Finance
magazine
Management
Accounting Quarterly
conferences
courses
technical
committees
CMA certificate
CFM program
(certificate in
financial
management)
Financial Executives
International
Financial Executive
magazine
conferences,
courses
technical
committees
research foundation
“ask an FEI
researcher”
program
1-44
Education.
1-55 Ethics, Product Quality (15 min)
Though Green Acres is benefiting financially from its consumers’
misperception and has not purposely done anything misleading
(since it has never labeled its products as “organic”), it cannot
continue to allow consumers to think its products are organic. As it
knows that its consumers perceive its products as “organic” and that
many consumers buy Green Acres products specifically for this
reason, Green Acres has a moral obligation to inform them about its
true practices. Even if the health and environmental consequences
of genetically modified organisms are yet unknown, the potential for
harm to the consumer necessitates that Green Acres advise
consumers of its use of genetically modified crops and notify them
that risks might potentially exist from consuming its products.
1-45
Education.
Chapter 01 - Cost Management and Strategy
1-56 Ethics; Who, What, and How?; Use of Internet (20 min)
1. The three most common behavioral indicators are (see Figure 71 of
the Report):
2. Smaller companies are more vulnerable to fraud. This reason is likely
3. $145,000 (see page 4 of Report)
4. The top three means by which occupational fraud is detected, in
order (see Figure 11):
5. Hotlines can be very helpful. In particular they dramatically increase
the effectiveness of the most important detection device, the
employee tip (see Figure 14).
1-46
Education.
Chapter 01 - Cost Management and Strategy
1-57 Most Ethical Companies (15 min)
The Ethisphere annual report is likely to be interesting to all three, the
business manager, the regulator, and the investor.
The business manager can use the information, together with information
from other sources, to benchmark the manager’s own company in the
status of the ethical environment in the manager’s company. If your
company is not on the list, or not nominated, the CFO and other managers
should consider if failing to be listed or nominated reflects deficiencies in
the ethical environment. The assumption is that the company’s
management is concerned to maintain an effective ethical climate. The
Ethisphere report can be a catalyst for needed change.
The regulator who is concerned with accurate financial or other reports
from the company may use the information to serve as a basis for better
understanding what a successful ethical climate looks like, to identify
industries where ethical climates are more advanced, and to provide a
starting point for assessing the reports and behaviors of a company that
falls under that regulator’s jurisdiction.
Many investors use information such as the Ethisphere report in helping to
determine whether or not to invest in a particular firm or industry. A
positive report on ethical climate for a firm, together with other information,
is often the basis for such decisions by the “ethical investor.”
1-47
Education.
1-58 Changed Conditions and Ethical Behavior (10 min)
This case is intended for class discussion. The goal is to have a
discussion of the role of conditions that might affect the accountant’s ethical
judgment. In this study, the researcher found that most accountants chose
to approve the financial statement in case (b), where the misstatement is
spread over three years. The researcher argued that “…unethical acts can
become an integral part of the day-to-day activities to such an extent that
individuals may be unable to see in in appropriateness of their behaviors.”
A short class discussion should uncover other arguments, such as a
different impact on investors between the two cases. The discussion
should include a recognition and discussion of at least the three important
factors:
In each case, there is unethical behavior, the fact that it is
accountant is not the perpetrator)
Source: Alina Tugend, “Doing the Ethical Thing May be Right, But It Isn’t
Automatic,” The New York Times, November 19, 2011, p B5.
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Chapter 01 - Cost Management and Strategy
1-59 GM Ignition Defect, Brand Value (20 min)
This problem is best used for class discussion, as there are a likely to be a
wide range of views expressed and an opportunity for useful dialogue
within the class regarding the ethical issues in the case.
1. In situations like this the management accountant should consider the
IMA ethical standards of competence, confidentiality, and integrity.
The standard of competence requires the management accountant to
perform their duties in accordance with “relevant laws, regulations, and
technical standards.” This would include required reports to the National
Highway Traffic Safety Administration (NHTSA) regarding product safety.
The standard of confidentiality is important in this situation because it
requires the management accountant to keep information confidential
unless legally required or otherwise authorized to disclose it. Note that
the IMA guidance on application of ethical standards states that the
disclosure should begin within the company, and then proceed to and IMA
Ethics Counselor and then to an independent attorney.
The standard of integrity is applicable because it guides the
management accountant to refrain from conduct that would impair the
accountant’s ability to act ethically, and also to refrain from activities that
might discredit the profession.
Overall, a key lesson from the GM defect case is that a company must
have an open and ethical culture in which problems like this one are
promptly identified, communicated internally (and externally when
appropriate), and dealt with appropriately. To address their internal issues
on the matter and to increase transparency within the company after the
February announcement, GM formed a program, “Speak Up for Safety,” to
motivate employees to act in the desired manner.
2. There has been much controversy and speculation about the cause of
the delay. Some of the reasons offered are as follows:
Some would argue that cars cannot be perfectly safe, and that safety
1-49
Education.
Chapter 01 - Cost Management and Strategy
1-59 (continued -1)
Others would argue that the vehicles involved were low-cost vehicles
and for this reason, as above, the company bears less responsibility
for the safety risk. Same counterpoint as above.
arising from events prior to July 10, 2009. CEO Mary T. Barra has
indicated that GM will not plan to use this argument in the defective
switch case, but rather to rely instead on financial settlements
through the company’s litigation compensation program headed by
Kenneth R. Feinberg, a victim compensation expert.
3. While the sales of GM vehicles has not shown an effect immediately
following the announcement of the ignition switch defect, it is
unknown whether there will be a longer term effect on the GM brand.
The financial news service, 24/7 Wall Street, reports that GM is the
most damaged of the “Nine Most Damaged Brands”
(http://247wallst.com/special-report/2014/05/13/americas-nine-most-
damaged-brands-3/).
Source: Curtis Vershoor, “Ethics Missteps Damage Brand Value,”
Strategic Finance, July 2014, pp 11-13, “History Guides Other Cases of
G.M.’s Behavior,” The New York Times, March 28, 2014, p B1; Hillary
Stout, Bill Vlasic, Danielle Ivory, and Rebecca R. Ruiz, “G.M. Prepares to
Count Cost of Suffering,” The New York Times, June 22, 2014. pB1;
Alexander E.M. Hess, Vince Calio and Thomas C. Frohlich, “America’s
Most Damaged Brands,” May 13, 2014, 24/7 Wall Street.
1-50
Education.
