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:Deferring December’s routine monthly maintenance on packaging equipment by an independent contractor until January of next year.Extending the close of the current fiscal year beyond December 31 so that some sales of next year are included in the current year.Altering dates of shipping documents of next January’s sales to record them as sales in December of the current year.Giving salespeople a double bonus to exceed December sales targets.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.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.Persuading carriers to accept merchandise for shipment in December of the current year even though they normally would not have done so.Why might the snack-foods division president want to take these end-of-year actions?Butler is deeply troubled and reads the “Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management.” Classify each of the end-of-year actions as acceptable or unacceptable according to that document.10. 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?

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Asked Dec 17, 2019
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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:

  1. Deferring December’s routine monthly maintenance on packaging equipment by an independent contractor until January of next year.
  2. Extending the close of the current fiscal year beyond December 31 so that some sales of next year are included in the current year.
  3. Altering dates of shipping documents of next January’s sales to record them as sales in December of the current year.
  4. Giving salespeople a double bonus to exceed December sales targets.
  5. 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.
  6. 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.
  7. Persuading carriers to accept merchandise for shipment in December of the current year even though they normally would not have done so.
  8. Why might the snack-foods division president want to take these end-of-year actions?
  9. Butler is deeply troubled and reads the “Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management.” Classify each of the end-of-year actions as acceptable or unacceptable according to that document.

10. 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?

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Expert Answer

Step 1

8. Why might the snack-foods division president want to take these end-of-year actions?- The clear reason behind president taking these year end decisions is to inflate the earnings of the current year artificially.  This is because during the current year , due to recession the company has not been able to grow at a trend it was during previous years. In order to show the track of organisation as growing & reporting annual growth similar to previous years, the president want to take these year end decisions which will help in recording lesser cost & more income during the current year helping the reports to be upto the mark as comapred to the previous year.

Step 2

9.) Classify each of the end-of-year actions as acceptable or unacceptable-

Practitioners of management accounting and financial management have an obligation to the public, their profession, the organization they serve, and themselves, to maintain the highest standards of ethical conduct. The Institute of Management Accountants has promulgated the following standards of ethical conduct for practitioners of management accounting and financial management.  These are : competence, confidentiality, integrity, and objectivity. We shall classify the year end decisions on these basis below-

a. ) Deferring December’s routine monthly maintenance on packaging equipment by an independent contractor until January of next year- Unacceptable

Not taking the monthly maintainance on time for machinery may hamper its working & also may be risky for workers should it lead to any accidental damage. Therefore, its a violation of ethical standards of IMA under the integrity as well as competency as it will refrain them from following the technical standards set up for machine under the standard of Competence.

 

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- Unacceptable

This is in violation of standards of competence , objectivity as well as integrity under IMA standards. This is because they are not following the relevant rules and laws of time period concept of accountin which states that accounts must be prepared on the last date of the fiscal year, the reports prepared would be incorrect & misleading as they will include the data for sales of next month too. So they are failing to comply with the standard of providing relaible information & communicating information fairly.

 

c.) Altering dates of shipping documents of next January’s sales to record them as sales in December of the current year- Unacceptable

Altering the dates of shipping documents is violating the standard of integrity as well as objectivity.  In accounting, itis considered unethical to alter or change the information without any valid reason. Here, just to achieve higher sales figure- the next year sales are being reported in current year using change of dates. This will mislead all the related parties of the organisation. therefore, the standard of objectivity stating *Communicating information fairly and objectively, the standard of integrity stating to prepare complete and clear reports and recommendations after appropriate analysis of relevant and reliable information are all taken for toss.

 

d. Giving salespeople a double bonus to exceed December sales targets- Acceptable

In many organisations, the final weeks of a fiscal year are heavily concentrated in making as many sales as possible & for this reason lot of incentives , marketing strategies like discount etc are incorporated. There is no vialotion as per IMA standards here.

Step 3

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- Acceptable

As said in earlier step, there are various measures adopted by organisations to shoot up their sales & control cost during the final weeks of fiscal year. therefore, by reducing the television spot runs in december, the company can reduce its advertssing cost which will inturn help it to upscale its earnings. There is no falsification of any accounts & hence this is in line with the standards of IMA.

 

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.- Unacceptable

 As evident here, advertising agency is bei...

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