SOLUTION
(30 min.) Pharmaceutical company, budgeting, ethics.
1. The overarching principles of the IMA Statement of Ethical Professional Practice are
Honesty, Fairness, Objectivity and Responsibility. The statement’s corresponding “Standards for
Ethical Behavior…” require management accountants to
Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
Communicate information fairly and objectively.
Disclose all relevant information that could reasonably be expected to influence an
intended user’s understanding of the reports, analyses, or recommendations.
The idea of capitalizing some of the company’s R&D expenditures is a direct violation of the
IMA’s ethical standards above. This transaction would not be “in accordance with relevant laws,
regulations, and technical standards.” GAAP requires research and development costs to be
expensed as incurred. Even if Jackson believes his transaction is justifiable, it violates the
profession’s technical standards and would be unethical.
The other “year-end” actions occur in many organizations and fall into the “gray” to
“acceptable” area. Much depends on the circumstances surrounding each one, however, such as
the following:
a. Stop all research and development efforts on the drug Vyacon until
b. Sell off rights to the drug, Martek. The company had not planned on doing this
2. While it is not uncommon for companies to sacrifice long-term profits for short-term
gains, it may not be in the best interest of the company’s shareholders. In the case of BrisCor, the
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Jackson definitely faces an ethical dilemma. It is not unethical on Jackson’s part to want
to please his new boss, nor is it unethical that Jackson wants to make a good impression on his
1-35 Professional ethics and end-of-year actions. Linda Butler is the new division controller
of the snack-foods division of Daniel Foods. Daniel Foods has reported a minimum 15% growth
in annual earnings for each of the past 5 years. The snack-foods division has reported annual
earnings growth of more than 20% each year in this same period. During the current year, the
economy went into a recession. The corporate controller estimates a 10% annual earnings growth
rate for Daniel Foods this year. One month before the December 31 fiscal year-end of the current
year, Butler estimates the snack-foods division will report an annual earnings growth of only 8%.
Rex Ray, the snack-foods division president, is not happy, but he notes that the “end-of-year
actions” still need to be taken.
Butler makes some inquiries and is able to compile the following list of end-of-year
actions that were more or less accepted by the previous division controller:
a. Deferring December’s routine monthly maintenance on packaging equipment by an
independent contractor until January of next year.
b. Extending the close of the current fiscal year beyond December 31 so that some sales of next
year are included in the current year.
c. Altering dates of shipping documents of next January’s sales to record them as sales in
December of the current year.
d. Giving salespeople a double bonus to exceed December sales targets.
e. Deferring the current period’s advertising by reducing the number of television spots run in
December and running more than planned in January of next year.
f. Deferring the current period’s reported advertising costs by having Daniel Foods’ outside
advertising agency delay billing December advertisements until January of next year or by
having the agency alter invoices to conceal the December date.
g. Persuading carriers to accept merchandise for shipment in December of the current year even
though they normally would not have done so.
Required:
1. Why might the snack-foods division president want to take these end-of-year actions?
2. Butler is deeply troubled and reads the “Standards of Ethical Behavior for Practitioners of
Management Accounting and Financial Management” in Exhibit 1-7 (page 17). Classify each
of the end-of-year actions (a–g) as acceptable or unacceptable according to that document.
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3. What should Butler do if Ray suggests that these end-of-year actions are taken in every
division of Daniel Foods and that she will greatly harm the snack-foods division if she does
not cooperate and paint the rosiest picture possible of the division’s results?
SOLUTION
(30–40 min.) Professional ethics and end-of-year actions.
1. The possible motivations for the snack foods division wanting to take end-of-year actions
include:
(a) Management incentives. Daniel Foods may have a division bonus scheme based on
one-year reported division earnings. Efforts to front-end revenue into the current year
or transfer costs into the next year can increase this bonus.
(b) Promotion opportunities and job security. Top management of Daniel Foods likely
will view those division managers who deliver high reported earnings growth rates as
being the best prospects for promotion. Division managers who deliver “unwelcome
surprises” may be viewed as less capable.
(c) Retain division autonomy. If top management of Daniel Foods adopts a “management
by exception” approach, divisions that report sharp reductions in their earnings
growth rates may attract a sizable increase in top management supervision.
2. The “Standards of Ethical Conduct . . . ” require management accountants to
Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
Communicate information fairly and objectively.
Several of the “end-of-year actions” clearly are in conflict with these requirements and should be
viewed as unacceptable by Butler.
(b) The fiscal year-end should be closed on midnight of December 31. “Extending” the
close falsely reports next year’s sales as this year’s sales.
(c) Altering shipping dates is falsification of the accounting reports.
(f) Advertisements run in December should be charged to the current year. The
advertising agency is facilitating falsification of the accounting records.
The other “end-of-year actions” occur in many organizations and fall into the “gray” to
“acceptable” area. However, much depends on the circumstances surrounding each one, such as
the following:
(a) If the independent contractor does not do maintenance work in December, there is no
transaction regarding maintenance to record. The responsibility for ensuring that
packaging equipment is well maintained is that of the plant manager. The division
controller probably can do little more than observe the absence of a December
maintenance charge.
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(d) In many organizations, sales are heavily concentrated in the final weeks of the fiscal
year-end. If the double bonus is approved by the division marketing manager, the
division controller can do little more than observe the extra bonus paid in December.
(e) If TV spots are reduced in December, the advertising cost in December will be
reduced. There is no record falsification here.
(g) Much depends on the means of “persuading” carriers to accept the merchandise. For
example, if an under-the-table payment is involved, or if carriers are pressured to
accept merchandise, it is clearly unethical. If, however, the carrier receives no extra
consideration and willingly agrees to accept the assignment because it sees potential
sales opportunities in December, the transaction appears ethical.
Each of the (a), (d), (e), and (g) “end-of-year actions” may well disadvantage Daniel Foods in the
long run. For example, lack of routine maintenance may lead to subsequent equipment failure.
3. If Butler believes that Ray wants her to engage in unethical behavior, she should first
directly raise her concerns with Ray. If Ray is unwilling to change his request, Butler should
discuss her concerns with the Corporate Controller of Daniel Foods. She could also initiate a
1-36 Professional ethics and end-of-year actions. Phoenix Press produces consumer
magazines. The house and home division, which sells home-improvement and home-decorating
magazines, has seen a 20% reduction in operating income over the past 9 months, primarily due
to an economic recession and a depressed consumer housing market. The division’s controller,
Sophie Gellar, has felt pressure from the CFO to improve her division’s operating results by the
end of the year. Gellar is considering the following options for improving the division’s
performance by year-end:
a. Cancelling two of the division’s least profitable magazines, resulting in the layoff of 25
employees.
b. Selling the new printing equipment that was purchased in January and replacing it with
discarded equipment from one of the company’s other divisions. The previously discarded
equipment no longer meets current safety standards.
c. Recognizing unearned subscription revenue (cash received in advance for magazines that
will be delivered in the future) as revenue when cash is received in the current month (just
before fiscal year-end) instead of showing it as a liability.
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d. Reducing the liability and related expense related to employee pensions. This would increase
the division’s operating income by 3%.
e. Recognizing advertising revenues that relate to January in December.
f. Switching from declining balance to straight-line depreciation to reduce depreciation expense
in the current year.
Required:
1. What are the motivations for Gellar to improve the division’s year-end operating earnings?
2. From the point of view of the “Standards of Ethical Behavior for Practitioners of
Management Accounting and Financial Management,” Exhibit 1-7 (page 17), which of the
preceding items (a–f) are acceptable? Which are unacceptable?
3. What should Gellar do about the pressure to improve performance?
SOLUTION
(30 min.) Professional ethics and end-of-year actions.
1. The possible motivations for Controller Sophie Gellar to modify the division’s year-end
earnings are
(i) Job security and promotion. The company’s CFO will likely reward her for meeting the
(ii) Management incentives. Gellar’s bonus may be based on the division’s ability to meet
2. The overarching principles of the IMA Statement of Ethical Professional Practice are
Honesty, Fairness, Objectivity and Responsibility. The statement’s corresponding “Standards for
Ethical Conduct…” require management accountants to
Perform professional duties in accordance with relevant laws, regulations, and technical
standards.
Several of the “year-end” actions are clearly in conflict with the statement’s principles and
required standards and should be viewed as unacceptable.
(c) Subscription revenue received in December in advance for magazines that will be sent
(d) Reducing the liability and related expenses for employee pensions would violate
Generally Accepted Accounting Principles unless the pension expense and liability are
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(e) Booking advertising revenues that relate to January in December falsely reports next
The other “year-end” actions occur in many organizations and fall into the “gray” to
“acceptable” area. Much depends on the circumstances surrounding each one, however, such as
the following:
(a) Cancelling two of the division’s least profitable magazines, resulting in the layoff of
twenty-five employees. While employee layoffs may be necessary for the business to
(b) Selling the new printing equipment that was purchased in January and replacing it with
discarded equipment from one of the company’s other divisions. The previously discarded
equipment no longer meets current safety standards. Again, while this method may result
(f) Switching from declining balance to straight line depreciation to reduce depreciation
expense in the current year. Many companies switch their depreciation policy from one
3. Gellar should directly raise her concerns first with the CFO, especially if the pressure from
the CFO is so great that the only course of action on the part of the controller is to otherwise
behave unethically. If the CFO refuses to change his direction, then the controller should raise
these issues with the CEO, and next to the Audit Committee and the Board of Directors, after
1-37 Ethical challenges, global company environmental concerns. Contemporary Interiors
(CI) manufactures high-quality furniture in factories in North Carolina for sale to top American
retailers. In 1995, CI purchased a lumber operation in Indonesia, and shifted from using
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American hardwoods to Indonesian ramin in its products. The ramin proved to be a cheaper
alternative, and it was widely accepted by American consumers. CI management credits the early
adoption of Indonesian wood for its ability to keep its North Carolina factories open when so
many competitors closed their doors. Recently, however, consumers have become increasingly
concerned about the sustainability of tropical woods, including ramin. CI has seen sales begin to
fall, and the company was even singled out by an environmental group for boycott. It appears
that a shift to more sustainable woods before year-end will be necessary, and more costly.
In response to the looming increase in material costs, CEO Geoff Armstrong calls a meeting of
upper management. The group generates the following ideas to address customer concerns and/or
salvage company profits for the current year:
a. Pay local officials in Indonesia to “certify” the ramin used by CI as sustainable. It is not
certain whether the ramin would be sustainable or not. Put highly visible tags on each piece
of furniture to inform consumers of the change.
b. Make deep cuts in pricing through the end of the year to generate additional revenue.
c. Record executive year-end bonus compensation accrued for the current year when it is paid
in the next year after the December fiscal year-end.
d. Reject the change in materials. Counter the bad publicity with an aggressive ad campaign
showing the consumer products as “made in the USA,” since manufacturing takes place in
North Carolina.
e. Redesign upholstered furniture to replace ramin contained inside with less expensive
recycled plastic. The change in materials would not affect the appearance or durability of the
furniture. The company would market the furniture as “sustainable.”
f. Pressure current customers to take early delivery of goods before the end of the year so that
more revenue can be reported in this year’s financial statements.
g. Begin purchasing sustainable North American hardwoods and sell the Indonesian lumber
subsidiary. Initiate a “plant a tree” marketing program, by which the company will plant a
tree for every piece of furniture sold. Material costs would increase 25%, and prices would
be passed along to customers.
h. Sell off production equipment prior to year-end. The sale would result in one-time gains that
could offset the company’s lagging profits. The owned equipment could be replaced with
leased equipment at a lower cost in the current year.
i. Recognize sales revenues on orders received but not shipped as of the end of the year.
Required:
1. As the management accountant for Contemporary Interiors, evaluate each of the preceding
items (a–i) in the context of the “Standards of Ethical Behavior for Practitioners of
Management Accounting and Financial Management,” Exhibit 1-7 (page 17). Which of the
items are in violation of these ethics standards and which are acceptable?
2. What should the management accountant do with regard to those items that are in violation
of the ethical standards for management accountants?
SOLUTION
(40 min.) Ethical challenges, global company.
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1. The overarching principles of the IMA Statement of Ethical Professional Practice are
Honesty, Fairness, Objectivity, and Responsibility. The statement’s corresponding “Standards for
Ethical Conduct…” require management accountants to
Several of the suggestions made by Armstrong’s staff are clearly in conflict with the statement’s
principles and required standards and should be viewed as unacceptable.
a. Pay local o#cials to “certify” the ramin used by CI as sustainable. It
c. Record executive year-end bonus compensation accrued for the current year when it is
paid in the next year after the December fiscal year-end. GAAP requires expenses to be
f. Pressure current customers to take early delivery of goods before the end of the year so
that more revenue can be reported in this year’s financial statements. This tactic,
commonly known as channel stuffing, merely results in shifting future period revenues
into the current period. The overstatement of revenue in the current period may mislead
investor’s to believe that the company’s financial well-being is better than the actual
results achieved. This practice would violate the IMA’s standards of credibility and
integrity. Channel stuffing is frequently considered a fraudulent practice.
i. Recognize sales revenues on orders received but not shipped as of the end of the year.
GAAP requires income to be recorded (accrued) when the four criteria of revenue
recognition have been met:
1. The company has completed a significant portion of the production and sales
effort.
Because criteria 1 and 3 have not been met at the time the order is placed, the revenue should not
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d. Reject the change in materials. Counter the bad publicity with an aggressive ad
campaign showing the consumer products as “made in the USA,” since
e. Redesign upholstered furniture to replace ramin contained inside with less expensive
recycled plastic. Creative changes in product design using recycled materials will
g. Begin purchasing sustainable North American hardwoods and sell
the Indonesian lumber subsidiary. Initiate a “plant a tree” marketing
program, by which the company will plant a tree for every piece of
b. Make deep cuts in pricing through the end of the year to generate additional revenue.
h.Sell-off production equipment prior to year-end. The sale would result in one-time
gains that could offset the company’s lagging profits. The owned equipment could be
2. It is possible that any of the “year-end” actions that fall into the “gray” area may be good
for investors, depending on the credible evidence that supports the management decision. For
Those decisions that clearly violate the IMA code of ethical standards (a, c, f, and i)
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