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Case 1-8
A Faulty Budget
Jackson Daniels graduated from Lynchberg State College two years ago. Since graduating from the college,
he has worked in the accounting department of Lynchberg Manufacturing. Daniels was recently asked to
prepare a sales budget for the year 2014. He conducted a thorough analysis and came out with projected
sales of 250,000 units of product. That represents a 25 percent increase over 2013.
Daniels went to lunch with his best friend, Jonathan Walker, to celebrate the completion of his first solo
job. Walker noticed Daniels seemed very distant. He asked what the matter was. Daniels stroked his chin,
ran his hand through his bushy, black hair, took another drink of scotch, and looked straight into the eyes of
his friend of 20 years. “Jon, I think I made a mistake with the budget.”
“What do you mean?” Walker answered.
“You know how we developed a new process to manufacture soaking tanks to keep the ingredients
fresh?”
“Yes,” Walker answered.
“Well, I projected twice the level of sales for that product than will likely occur.”
“Are you sure?” Walker asked.
“I checked my numbers. I’m sure. It was just a mistake on my part,” Daniels replied.
“So, what are you going to do about it?” asked Walker.
“I think I should report it to Pete. He’s the one who acted on the numbers to hire additional workers to
produce the soaking tanks,” Daniels said.
“Wait a second,” Walker said. “How do you know there won’t be extra demand for the product? You and
I both know demand is a tricky number to project especially when a new product comes on the market.
Why don’t you sit back and wait to see what happens?”
“But what happens if I’m right and the sales numbers were wrong? What happens if the demand does
not increase beyond what I now know to be the correct projected level?” Daniels asks.
“Well, you can tell Pete about it at that time. Why raise a red flag now when there may be no need?”
Walker states.
As the lunch comes to a conclusion, Walker pulls Daniels aside and says, “Jack, this could mean your
job. If I were in your position I’d protect my own interests first.”
NOTES
This case provides a way to discuss with students how to handle errors made on a job. This case is dealing
with making a mistake in an estimate, which many accountants often do. Many think that all errors should
be covered up. An ethical person or company owns up to mistakes honestly.
Ethical Issues
The ethical issues here are how to handle the situation of having made a mistake in a job; the short term
versus the long term consequences; a certainty versus a possibility; the economic loss to company versus
possible job loss to self. The values involved are trustworthiness, respect, diligence, fairness and caring.
Ask students how they would want a doctor or pharmacy to handle a mistake in supplying the wrong
medicine to them. Ask students how a professor should handle an error in grading or calculations of grades.
Questions
1. What should an employee do when he or she discovers that there is an error in a projection? Why
do you suggest that action? Would your answer change if the error was not lie kely to affect other
aspects of the operation such as employment? Why or why not?
An employee should tell his supervisor so that the supervisor is not a surprised and so that any potential
damage is lessened. An ethical response should not change based upon the magnitude of the consequences.
2. Identify the stakeholders potentially affected by what Daniels decides to do. How might each
stakeholder be affected by Daniels’s action and decision? Use ethical reasoning to support your
answer.
The stakeholders affected by this situation are the other employees (especially those hired as a result of the
higher than justified budget), the community, stockholders, creditors, the supervisor, and Daniel. The
employees hired and the community might be affected by loss of job positions; the sooner these groups
know the better. The creditors and the stockholders might lose actual dollars; both groups can minimize
potential losses the sooner the error is known. The supervisor has an obligation to provide a work
environment where employees can make, correct and learn from mistakes. If this mistake was one that
3. Assume Daniels is both a CPA and holds the Certified Management Accountant (CMA)
certification granted by the IMA. Use the ethical standards of these two organizations to identify
what Daniels should do in this situation.
Under the AICPA and IMA standards, Daniels should act with integrity. He should explain his mistake to
Pete so that the budget can be amended and the firm can plan how to absorb the additional workforce.
