Ethical Obligations and Decision Making in Accounting, 4/e 1
Case 2-4 A Faulty Budget (a GVV Case)
Jackson Daniels graduated from Lynchberg State College two years ago. Since graduating from
college, he has worked in the accounting department of Lynchberg Manufacturing. Daniels was
recently asked to prepare a sales budget for the year 2016. He conducted a thorough analysis and
came out with projected sales of 250,000 units of product. That represents a 25 percent increase
over 2015.
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?”
“I checked my numbers. I’m sure. It was just a mistake on my part.”
Walker asked Daniels what he planned to do about it.
“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.
“You know Pete is always pressuring us to ‘make the numbers.’ Also, Pete has a zero tolerance
for employees who make mistakes. That’s why it’s standard practice around here to sweep things
under the rug. Besides, it’s a one-time event—right?”
Ethical Obligations and Decision Making in Accounting, 4/e 2
“Well, you can tell Pete about it at that time. Why raise a red flag now when there may be no
need?”
“Come in, Jack” Pete said.
“Thanks, Pete. I asked to see you on a sensitive matter.”
“I’m listening.”
“Yes, I know.”
“That means ten have to be laid off or fired. They won’t be happy and once word filters through
the company, other employees may wonder if they are next.”
“I hadn’t thought about it that way.”
“Well, you should have.” Here’s what we are going to do…and this is between you and me.
Don’t tell anyone about this conversation.”
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
Questions
1. What are Daniels’s options in this situation? Use ethical reasoning to identify the
best alternative. What would you do if you were in Daniels’ position?
Daniels could go along with Pete to cover up the mistake and not say anything to
Cwervo. This is using egoism (stage 2 of Kohlberg’s model) so Daniels (and Pete) would
be assured of keeping his job and saving face, until and unless the mistake is found out.
Using utilitarianism theory could support not telling Cwervo as then the new hires would
be able to keep their jobs, which may be the greatest good for the greatest number.
However, if Daniels considers the future loss of jobs and reputation to the company
2. Given that you have decided to take some action even though you had agreed not to
do so, who would you approach to express your point of view and why?
Ethical Obligations and Decision Making in Accounting, 4/e 4
Daniels should tell Cwervo as soon as possible. Cwervo may want to consult with Pete
and the CEO. The firm might need to lay off the workers just hired, but it might also be
3. What is at stake for the key parties?
Daniels could lose his job for owing up to his mistake. Walker could also lose his job or a
good friend (Daniels) at work. Pete could lose his reputation (and possibly his job) after
hiring workers for production when there was little demand. Pete could also lose his job
4. What are the main arguments you are likely to encounter in making the strongest
case possible?
Daniels is arguing for correcting an error in budgeting with long-term consequences. The
corrections affect the new hires, Pete, and the company’s image and reputation. Thus,
Cwervo, another officer, or the other stakeholders might use the issues of materiality or
5. What is your most powerful and persuasive response to the reasons and
rationalizations you may need to address? To whom should the argument be made?
When and in what context?
Daniels should respond to the argument of materiality by noting that most external
auditors use 5-to-10 percent, as a rule of thumb, but if it is a high risk area could use less.
If the error is expected to be netted against higher revenues and lower costs/expenses for
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Daniels should counter the locus of loyalty rationalization by questioning who the firm
has loyalty to and in what priority. Although it is never good to hire and shortly after lay-
off employees, but is loyalty the same to all employees. Does the firm have a greater
loyalty to senior employees? Does the firm have a loyalty to all employees to provide
secure benefits, especially retirement benefits? Will being loyal to the recent hires come
at the expense of senior employees, providing for retirement needs of past and current
employees? Does the firm owe any loyalty to investors and creditors? Does the loyalty to
recent hires come at the expense of those investors and creditors?