Ethics in Business
Consumers and attorney generals in more than 40 states accused a prominent nationwide chain of auto repair shops of misleading customers and selling them unnecessary parts and services, from brake jobs to front-end alignments. Lynn Sharpe Paine reported the situation as follows in ''Managing for Organizational Integrity," Harvard Business Review, Volume 72 Issue 3:
In the face of declining revenues, shrinking market share, and an increasingly competitive market... management attempted to spur performance of its auto centers.... The automotive service advisers were given product-specific sales quotas−sell so many springs, shock absorbers, alignments, or brake jobs per shift−and paid a commission based on sales.... [F]ailure to meet quotas could lead to a transfer or a reduction in work hours. Some employees spoke of the "pressure, pressure, pressure'' to bring in sales. This pressure-cooker atmosphere created conditions under which employees felt that the only way to satisfy" top management was by selling products and services to customers that they didn't really need.
Suppose all automotive repair businesses routinely followed the practice of attempting to sell customers unnecessary" parts and services.
Required:
1. How would this behavior affect customers? How might customers attempt to protect themselves against this behavior?
2. How would this behavior probably affect profits and employment in the automotive service industry?
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- Posavek is a wholesale supplier of building supplies building contractors, hardware stores, and home-improvement centers in the Boston metropolitan area. Over the years, Posavek has expanded its operations to serve customers across the nation and now employs over 200 people as technical representatives, buyers, warehouse workers, and sales and office staff. Most recently, Posavek has experienced fierce competition from the large online discount stores. In addition, the company is suffering from operational inefficiencies related to its archaic information system. Posavek revenue cycle procedures are described in the following paragraphs. Revenue Cycle Posaveks sales department representatives receive orders via traditional mail, e-mail, telephone, and the occasional walk-in customer. Because Posavek is a wholesaler, the vast majority of its business is conducted on a credit basis. The process begins in the sales department, where the sales clerk enters the customers order into the centralized computer sales order system. The computer and file server are housed in Posaveks small data processing department. If the customer has done business with Posavek in the past, his or her data are already on file. If the customer is a first-time buyer, however, the clerk creates a new record in the customer account file. The system then creates a record of the transaction in the open sales order file. When the order is entered, an electronic copy of it is sent to the customers e-mail address as confirmation. A clerk in the warehouse department periodically reviews the open sales order file from a terminal and prints two copies of a stock release document for each new sale, which he uses to pick the items sold from the shelves. The warehouse clerk sends one copy of the stock release to the sales department and the second copy, along with the goods, to the shipping department. The warehouse clerk then updates the inventory subsidiary file to reflect the items and quantities shipped. Upon receipt of the stock release document, the sales clerk accesses the open sales order file from a terminal, closes the sales order, and files the stock release document in the sales department. The sales order system automatically posts these transactions to the sales, inventory control, and cost-of-goods-sold accounts in the general ledger file. Upon receipt of the goods and the stock release, the shipping department clerk prepares the goods for shipment to the customer. The clerk prepares three copies of the bill of lading. Two of these go with the goods to the carrier and the third, along with the stock release document, is filed in the shipping department. The billing department clerk reviews the closed sales orders from a terminal and prepares two copies of the sales invoice. One copy is mailed to the customer, and the other is filed in the billing department. The clerk then creates a new record in the accounts receivable subsidiary file. The sales order system automatically updates the accounts receivable control account in the general ledger file. CASH RECEIPTS PROCEDURES Mail room clerks open customer cash receipts, reviews the check and remittance advices for completeness, and prepares two copies of a remittance list. One copy is sent with the checks to the cash receipts department. The second copy of the remittance advices are sent to the billing department. When the cash receipts clerk receives the checks and remittance list, he verifies the checks received against those on the remittance list and signs the checks For Deposit Only. Once the checks are endorsed, he records the receipts in the cash receipts journal from his terminal. The clerk then fills out a deposit slip and deposits the checks in the bank. Upon receipt of the remittances, the billing department clerk records the amounts in the accounts receivable subsidiary ledger from the department terminal. The system automatically updates the AR control account in the general ledger Posavek has hired your public accounting firm to review its sales order procedures for internal control compliance and to make recommendations for changes. Required a. Create a data flow diagram of the current system. b. Create a system flowchart of the existing system. c. Analyze the physical internal control weaknesses in the system. d. (Optional) Prepare a system flowchart of a redesigned computer-based system that resolves the control weaknesses that you identified. Explain your solution.arrow_forwardConsider the following conversation between Gary Means, manager of a division that produces industrial machinery, and his controller, Donna Simpson, a certified management accountant and certified public accountant: Gary: Donna, we have a real problem. Our operating cash is too low, and we are in desperate need of a loan. As you know, our financial position is marginal, and we need to show as much income as possibleand our assets need bolstering as well. Donna: I understand the problem, but I dont see what can be done at this point. This is the last week of the fiscal year, and it looks like well report income just slightly above breakeven. Gary: I know all this. What we need is some creative accounting. I have an idea that might help us, and I wanted to see if you would go along with it. We have 200 partially finished machines in process, about 20% complete. That compares with the 1,000 units that we completed and sold during the year. When you computed the per-unit cost, you used 1,040 equivalent units, giving us a manufacturing cost of 1,500 per unit. That per-unit cost gives us cost of goods sold equal to 1.5 million and ending work in process worth 60,000. The presence of the work in process gives us a chance to improve our financial position. If we report the units in work in process as 80% complete, this will increase our equivalent units to 1,160. This, in turn, will decrease our unit cost to about 1,345 and cost of goods sold to 1.345 million. The value of our work in process will increase to 215,200. With those financial stats, the loan would be a cinch. Donna: Gary, I dont know. What youre suggesting is risky. It wouldnt take much auditing skill to catch this one. Gary: You dont have to worry about that. The auditors wont be here for at least 6 to 8 more weeks. By that time, we can have those partially completed units completed and sold. I can bury the labor cost by having some of our more loyal workers work overtime for some bonuses. The overtime will never be reported. And, as you know, bonuses come out of the corporate budget and are assigned to overheadnext years overhead. Donna, this will work. If we look good and get the loan to boot, corporate headquarters will treat us well. If we dont do this, we could lose our jobs. Required: 1. Should Donna agree to Garys proposal? Why or why not? To assist in deciding, review the corporate code of ethics standards described in Chapter 1. Do any apply? 2. Assume that Donna refuses to cooperate and that Gary accepts this decision and drops the matter. Does Donna have any obligation to report the divisional managers behavior to a superior? Explain. 3. Assume that Donna refuses to cooperate; however, Gary insists that the changes be made. Now what should she do? What would you do? 4. Suppose that Donna is 63 and that the prospects for employment elsewhere are bleak. Assume again that Gary insists that the changes be made. Donna also knows that his supervisor, the owner of the company, is his father-in-law. Under these circumstances, would your recommendations for Donna differ?arrow_forwardCost Information and Ethical Behavior, Service Organization Jean Erickson, manager and owner of an advertising company in Charlotte, North Carolina, arranged a meeting with Leroy Gee, the chief accountant of a large, local competitor. The two are lifelong friends. They grew up together in a small town and attended the same university. Leroy is a competent, successful accountant but is having some personal financial difficulties after some of his investments turned sour, leaving him with a 15,000 personal loan to pay offjust when his oldest son is starting college. Jean, on the other hand, is struggling to establish a successful advertising business. She had recently acquired the rights to open a branch office of a large regional advertising firm headquartered in Atlanta, Georgia. During her first 2 years, she was able to build a small, profitable practice. However, the chance to gain a significant foothold in Charlotte hinged on the success of winning a bid to represent the state of North Carolina in a major campaign to attract new industry and tourism. The meeting she had scheduled with Leroy concerned the bid she planned to submit. Jean: Leroy, Im at a critical point in my business venture. If I can win the bid for the states advertising dollars, Ill be set. Winning the bid will bring 600,000 to 700,000 of revenues into the firm. On top of that, I estimate that the publicity will bring another 200,000 to 300,000 of new business. Leroy: I understand. My boss is anxious to win that business as well. It would mean a huge increase in profits for my firm. Its a competitive business, though. As new as you are, I doubt that youll have much chance of winning. Jean: Youre forgetting two very important considerations. First, I have the backing of all the resources and talent of a regional firm. Second, I have some political connections. Last year, I was hired to run the publicity side of the governors campaign. He was impressed with my work and would like me to have this business. I am confident that the proposals I submit will be very competitive. My only concern is to submit a bid that beats your firm. If I come in with a lower bid and good proposals, the governor can see to it that I get the work. Leroy: Sounds promising. If you do win, however, there will be a lot of upset people. After all, they are going to claim that the business should have been given to local advertisers, not to some out-of-state firm. Given the size of your office, youll have to get support from Atlanta. You could take a lot of heat. Jean: True. But I am the owner of the branch office. That fact alone should blunt most of the criticism. Who can argue that Im not a local? Listen, with your help, I think I can win this bid. Furthermore, if I do win it, you can reap some direct benefits. With that kind of business, I can afford to hire an accountant, and Ill make it worthwhile for you to transfer jobs. I can offer you an up-front bonus of 15,000. On top of that, Ill increase your annual salary by 20%. That should solve most of your financial difficulties. After all, we have been friends since day oneand what are friends for? Leroy: Jean, my wife would be ecstatic if I were able to improve our financial position as quickly as this opportunity affords. I certainly hope that you win the bid. What kind of help can I provide? Jean: Simple. To win, all I have to do is beat the bid of your firm. Before I submit my bid, I would like you to review it. With the financial skills you have, it should be easy for you to spot any excessive costs that I may have included. Or perhaps I included the wrong kind of costs. By cutting excessive costs and eliminating costs that may not be directly related to the project, my bid should be competitive enough to meet or beat your firms bid. Required: 1. What would you do if you were Leroy? Fully explain the reasons for your choice. What do you suppose the code of conduct for Leroys company would say about this situation? 2. What is the likely outcome if Leroy agrees to review the bid? Is there much risk to him personally if he reviews the bid? Should the degree of risk have any bearing on his decision?arrow_forward
- At the beginning of the last quarter of 20x1, Youngston, Inc., a consumer products firm, hired Maria Carrillo to take over one of its divisions. The division manufactured small home appliances and was struggling to survive in a very competitive market. Maria immediately requested a projected income statement for 20x1. In response, the controller provided the following statement: After some investigation, Maria soon realized that the products being produced had a serious problem with quality. She once again requested a special study by the controllers office to supply a report on the level of quality costs. By the middle of November, Maria received the following report from the controller: Maria was surprised at the level of quality costs. They represented 30 percent of sales, which was certainly excessive. She knew that the division had to produce high-quality products to survive. The number of defective units produced needed to be reduced dramatically. Thus, Maria decided to pursue a quality-driven turnaround strategy. Revenue growth and cost reduction could both be achieved if quality could be improved. By growing revenues and decreasing costs, profitability could be increased. After meeting with the managers of production, marketing, purchasing, and human resources, Maria made the following decisions, effective immediately (end of November 20x1): a. More will be invested in employee training. Workers will be trained to detect quality problems and empowered to make improvements. Workers will be allowed a bonus of 10 percent of any cost savings produced by their suggested improvements. b. Two design engineers will be hired immediately, with expectations of hiring one or two more within a year. These engineers will be in charge of redesigning processes and products with the objective of improving quality. They will also be given the responsibility of working with selected suppliers to help improve the quality of their products and processes. Design engineers were considered a strategic necessity. c. Implement a new process: evaluation and selection of suppliers. This new process has the objective of selecting a group of suppliers that are willing and capable of providing nondefective components. d. Effective immediately, the division will begin inspecting purchased components. According to production, many of the quality problems are caused by defective components purchased from outside suppliers. Incoming inspection is viewed as a transitional activity. Once the division has developed a group of suppliers capable of delivering nondefective components, this activity will be eliminated. e. Within three years, the goal is to produce products with a defect rate less than 0.10 percent. By reducing the defect rate to this level, marketing is confident that market share will increase by at least 50 percent (as a consequence of increased customer satisfaction). Products with better quality will help establish an improved product image and reputation, allowing the division to capture new customers and increase market share. f. Accounting will be given the charge to install a quality information reporting system. Daily reports on operational quality data (e.g., percentage of defective units), weekly updates of trend graphs (posted throughout the division), and quarterly cost reports are the types of information required. g. To help direct the improvements in quality activities, kaizen costing is to be implemented. For example, for the year 20x1, a kaizen standard of 6 percent of the selling price per unit was set for rework costs, a 25 percent reduction from the current actual cost. To ensure that the quality improvements were directed and translated into concrete financial outcomes, Maria also began to implement a Balanced Scorecard for the division. By the end of 20x2, progress was being made. Sales had increased to 26,000,000, and the kaizen improvements were meeting or beating expectations. For example, rework costs had dropped to 1,500,000. At the end of 20x3, two years after the turnaround quality strategy was implemented, Maria received the following quality cost report: Maria also received an income statement for 20x3: Maria was pleased with the outcomes. Revenues had grown, and costs had been reduced by at least as much as she had projected for the two-year period. Growth next year should be even greater as she was beginning to observe a favorable effect from the higher-quality products. Also, further quality cost reductions should materialize as incoming inspections were showing much higher-quality purchased components. Required: 1. Identify the strategic objectives, classified by the Balanced Scorecard perspective. Next, suggest measures for each objective. 2. Using the results from Requirement 1, describe Marias strategy using a series of if-then statements. Next, prepare a strategy map. 3. Explain how you would evaluate the success of the quality-driven turnaround strategy. What additional information would you like to have for this evaluation? 4. Explain why Maria felt that the Balanced Scorecard would increase the likelihood that the turnaround strategy would actually produce good financial outcomes. 5. Advise Maria on how to encourage her employees to align their actions and behavior with the turnaround strategy.arrow_forwardEthics and the ManagerRichmond, Inc., operates a chain of 44 department stores. Two years ago, the board of directors of Richmond approved a large-scale remodelling of its stores to attract a more upscale clientele.Before finalizing these plans, two stores were remodelled as a test. Linda Perlman, assistant controller, was asked to oversee the financial reporting for these test stores, and she and other management personnel were offered bonuses based on the sales growth and profitability of these stores. While completing the financial reports, Perlman discovered a sizable inventory of outdated goods that should have been discounted for sale or returned to the manufacturer. She discussed the situation with her management colleagues; the consensus was to ignore reporting this inventory as obsolete because reporting it would diminish the financial results and their bonuses.1. Managerial Accounting2. Would it be easy for Perlman to take the ethical action in this situation?arrow_forwardBig Apple Design Company specializes in designing commercial office space in Chicago. The firm’s president recently reviewed the following income statement and noticed that operating profits were below her expectations. She had a hunch that certain customers were not profitable for the company and asked the controller to perform a customer-profitability analysis showing profitability by customer for the month of March. Required: Put yourself in the position of Big Apple’s controller and write a memo to the president to accompany the customer-profitability graph. Comment on the implications of the customer-profitability analysis and raise four or more questions that should be addressed by the firm’smanagement team.arrow_forward
- In the scenario, where employer has been putting more emphasis on controlling costs for the various businesses. With the slowing of overall spending in one sector, while ordering managers to closely monitor expenses, selling several companies and giving vice presidents greater responsibility for statements of financial positions. Whatpositive and negative consequences might this pose to the company in future fraud prevention? Outline at least three of each type.arrow_forwardCathy’s Classic Clothes is a retailer that sells to professional women in the northeast. The firm leases space for stores in upscale shopping centers, and the organizational structure consists of regions, districts, and stores. Each region consists of two or more districts; each district consists of three or more stores. Each store, district, and region has been established as a profit center. At all levels, the company uses a responsibility-accounting system focusing on information and knowledge rather than blame and control. Each year, managers, in consultation with their supervisors, establish financial and nonfinancial goals, and these goals are integrated into the budget. Actual performance is mea-sured each month.The New England Region consists of the Coastal District and the Inland District. The Coastal District includes the New Haven, Boston, and Portland stores. The Coastal District’s performance has not been up to expectations in the…arrow_forwardYou are a Senior Manager in Federer & Co, a firm of Chartered Certified Accountants offering audit and assurance services mainly to large, privately-owned companies. The firm has suffered from increased competition, due to two new firms of accountants setting up in the same town. Several audit clients have moved to the new firms, leading to loss of revenue, and an over staffed audit department. Ann Agassi, one of the partners of Federer & Co, has asked you to consider how the firm could react to this situation. Several possibilities have been raised for your consideration:1. Nadal Co, a manufacturer of electronic equipment, is one of Federer & Co.’s audit clients. You are aware that the company has recently designed a new product, which market research indicates is likely to be very successful. The development of the product has been a huge drainon cash resources. The Managing Director of Nadal Co has written to the audit engagement partner to see if Federer & Co would…arrow_forward
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