978-0077733773 Chapter 1 Solution Manual Part 5

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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.”

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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

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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.

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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

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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.

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Education.