CHAPTER 1 THE MANAGER AND MANAGEMENT ACCOUNTING See the front matter of this Solutions Manual for suggestions

regarding your choices of assignment material for each chapter. 1-1 Management accounting measures, analyzes and reports financial and nonfinancial information that helps managers make decisions to fulfill the goals of an organization. It focuses on internal reporting and is not restricted by generally accepted accounting principles (GAAP). Financial accounting focuses on reporting to external parties such as in estors, go ernment agencies, and banks. It measures and records business transactions and pro ides financial statements that are based on generally accepted accounting principles (GAAP). !ther differences include (") management accounting emphasizes the future (not the past), and (#) management accounting influences the beha ior of managers and other employees (rather than primarily reporting economic e ents). 1-2 $inancial accounting is constrained by generally accepted accounting principles. %anagement accounting is not restricted to these principles. &he result is that management accounting allo's managers to charge interest on o'ners( capital to help )udge a di ision(s performance, e en though such a charge is not allo'ed under GAAP, management accounting can include assets or liabilities (such as *brand names+ de eloped internally) not recognized under GAAP, and management accounting can use asset or liability measurement rules (such as present alues or resale prices) not permitted under GAAP. 1-3 %anagement accountants can help to formulate strategy by pro iding information about the sources of competiti e ad antage,for example, the cost, producti ity, or efficiency ad antage of their company relati e to competitors or the premium prices a company can charge relati e to the costs of adding features that make its products or ser ices distincti e. 1-4 &he business functions in the alue chain are Research and develo !en",generating and experimenting 'ith ideas related to ne' products, ser ices, or processes. Des#$n o% rod&c"s and rocesses,the detailed planning, engineering, and testing of products and processes. Prod&c"#on,procuring, transporting, storing and assembling resources to produce a product or deli er a ser ice. Mar'e"#n$,promoting and selling products or ser ices to customers or prospecti e customers. D#s"r#(&"#on,processing orders and shipping products or ser ices to customers. C&s"o!er serv#ce,pro iding after-sales ser ice to customers.

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1-) Supply chain describes the flo' of goods, ser ices, and information from the initial sources of materials and ser ices to the deli ery of products to consumers, regardless of 'hether those acti ities occur in the same organization or in other organizations. .ost management is most effecti e 'hen it integrates and coordinates acti ities across all companies in the supply chain as 'ell as across each business function in an indi idual company(s alue chain. Attempts are made to restructure all cost areas to be more cost-effecti e. 1-* *%anagement accounting deals only 'ith costs.+ &his statement is misleading at best, and 'rong at 'orst. %anagement accounting measures, analyzes, and reports financial and nonfinancial information that helps managers define the organization(s goals, and make decisions to fulfill them. %anagement accounting also analyzes re enues from products and customers in order to assess product and customer profitability. &herefore, 'hile management accounting does use cost information, it is only a part of the organization(s information recorded and analyzed by management accountants. 1-+ %anagement accountants can help impro e /uality and achie e timely product deli eries by recording and reporting an organization(s current /uality and timeliness le els and by analyzing and e aluating the costs and benefits,both financial and non-financial,of ne' /uality initiati es such as &0%, relie ing bottleneck constraints or pro iding faster customer ser ice. 1-, &he fi e-step decision-making process is (") identify the problem and uncertainties (#) obtain information (1) make predictions about the future (2) make decisions by choosing among alternati es and (3) implement the decision, e aluate performance and learn. 1-Planning decisions focus on selecting organization goals and strategies, predicting results under arious alternati e 'ays of achie ing those goals, deciding ho' to attain the desired goals, and communicating the goals and ho' to attain them to the entire organization. Control decisions focus on taking actions that implement the planning decisions, deciding ho' to e aluate performance, and pro iding feedback and learning to help future decision making. 1-1. &he three guidelines for management accountants are ". 4mploy a cost-benefit approach. #. 5ecognize beha ioral and technical considerations. 1. Apply the notion of *different costs for different purposes+.

1-11 Agree. A successful management accountant re/uires general business skills (such as understanding the strategy of an organization) and people skills (such as moti ating other team members) as 'ell as technical skills (such as computer kno'ledge, calculating costs of products, and supporting planning and control decisions).

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1-12

&he ne' controller could reply in one or more of the follo'ing 'ays6 (a) 7emonstrate to the plant manager ho' he or she could make better decisions if the plant controller 'as ie'ed as a resource rather than a dead'eight. In a related 'ay, the plant controller could sho' ho' the plant manager(s time and resources could be sa ed by ie'ing the ne' plant controller as a team member. (b) 7emonstrate to the plant manager a good kno'ledge of the technical aspects of the plant. &his approach may in ol e doing background reading. It certainly 'ill in ol e spending much time on the plant floor speaking to plant personnel. (c) 8ho' the plant manager examples of the ne' plant controller(s past successes in 'orking 'ith line managers in other plants. 4xamples could include assistance in preparing the budget, assistance in analyzing problem situations and e aluating financial and nonfinancial aspects of different alternati es, and assistance in submitting capital budget re/uests. (d) 8eek assistance from the corporate controller to highlight to the plant manager the importance of many tasks undertaken by the ne' plant controller. &his approach is a last resort but may be necessary in some cases.

1-13 &he controller is the chief management accounting executi e. &he corporate controller reports to the chief financial officer, a staff function. .ompanies also ha e business unit controllers 'ho support business unit managers or regional controllers 'ho support regional managers in ma)or geographic regions. 1-14 &he Institute of %anagement Accountants (I%A) sets standards of ethical conduct for management accountants in the follo'ing four areas6 .ompetence .onfidentiality Integrity .redibility 1-1) 8teps to take 'hen established 'ritten policies pro ide insufficient guidance are (a) 7iscuss the problem 'ith the immediate superior (except 'hen it appears that the superior is in ol ed). (b) .larify rele ant ethical issues by confidential discussion 'ith an I%A 4thics .ounselor or other impartial ad isor. (c) .onsult your o'n attorney as to legal obligations and rights concerning the ethical conflicts.

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1-1*

("3 min.) /al&e cha#n and class#%#ca"#on o% cos"s0 co! &"er co! an12 Cos" I"e! a. b. c. d. e. f. g. h. /al&e Cha#n 3&s#ness 4&nc"#on Production 7istribution 7esign of products and processes 5esearch and 7e elopment .ustomer 8er ice or %arketing 7esign of products and processes (or 5esearch and 7e elopment) %arketing Production

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("3 min.) /al&e cha#n and class#%#ca"#on o% cos"s0 har!ace&"#cal co! an12 Cos" I"e! a. b. c. d. e. f. g. h. /al&e Cha#n 3&s#ness 4&nc"#on 7esign of products and processes %arketing .ustomer 8er ice 5esearch and 7e elopment %arketing Production %arketing 7istribution

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("3 min.) /al&e cha#n and class#%#ca"#on o% cos"s0 %as" %ood res"a&ran"2 Cos" I"e! a. b. c. d. e. f. g. h. /al&e Cha#n 3&s#ness 4&nc"#on Production 7istribution %arketing %arketing %arketing Production 7esign of products and processes (or 5esearch and 7e elopment) .ustomer ser ice

1-1-

("3 min.) 5e1 s&ccess %ac"ors2 Chan$e #n O era"#ons6 Mana$e!en" Acco&n"#n$ a. b. c. d. e. 5e1 7&ccess 4ac"or Inno ation .ost and 0uality &ime &ime and .ost .ost

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("9-"3 min.) Plann#n$ and con"rol dec#s#ons2 Ac"#on a. b. c. d. e. Dec#s#on Planning .ontrol .ontrol Planning Planning

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("3 min.) 4#ve-s"e dec#s#on-!a'#n$ rocess0 !an&%ac"&r#n$2 Ac"#on a. b. c. d. e. f. g. 7"e #n Dec#s#on-Ma'#n$ Process !btain information %ake predictions about the future Identify the problem and uncertainties Implement the decision, e aluate performance, and learn %ake predictions about the future %ake decisions by choosing among alternati es !btain information

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("3 min.) 4#ve-s"e dec#s#on-!a'#n$ rocess0 serv#ce %#r!2 Ac"#on a. b. c. d. e. f. 7"e #n Dec#s#on-Ma'#n$ Process !btain information Identify the problem and uncertainties !btain information and:or make predictions about the future %ake predictions about the future !btain information %ake decisions by choosing among alternati es

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("9;"3 min.) Pro%ess#onal e"h#cs and re or"#n$ d#v#s#on er%or!ance2

". %iller(s ethical responsibilities are 'ell summarized in the I%A(s *8tandards of 4thical .onduct for %anagement Accountants+ (4xhibit "-< of text). Areas of ethical responsibility include the follo'ing6 competence confidentiality integrity credibility

&he ethical standards related to %iller(s current dilemma are integrity, competence and credibility. =sing the integrity standard, %iller should carry out duties ethically and communicate unfa orable as 'ell as fa orable information and professional )udgments or opinions. .ompetence demands that %iller perform her professional duties in accordance 'ith rele ant la's, regulations, and technical standards and pro ide decision support information that is accurate. .redibility re/uires that %iller report information fairly and ob)ecti ely and disclose deficiencies in internal controls in conformance 'ith organizational policy and:or applicable la'. %iller should refuse to book the >#99,999 of sales until the goods are shipped. ?oth financial accounting and management accounting principles maintain that sales are not complete until the title is transferred to the buyer. #. %iller should refuse to follo' %aloney@s orders. If %aloney persists, the incident should be reported to the corporate controller. 8upport for line management should be 'holehearted, but it should not re/uire unethical conduct. 1-24 ". ("3 min.) Plann#n$ and con"rol dec#s#ons0 In"erne" co! an12 Plann#n$ dec#s#ons a. 7ecision to raise monthly subscription fee c. 7ecision to upgrade content of online ser ices (later decision to inform subscribers and upgrade online ser ices is an implementation part of control) e. 7ecision to decrease monthly subscription fee starting in Ao ember. Con"rol dec#s#ons b. 7ecision to inform existing subscribers about the rate of increase,an implementation part of control decisions d. 7ismissal of BP of %arketing,performance e aluation and feedback aspect of control decisions #. !ther planning decisions that may be made at CebAe's.com6 decision to raise or lo'er ad ertising feesD decision to charge a fee from on-line retailers 'hen customers click-through from CebAe's.com to the retailers( 'ebsites. !ther control decisions that may be made at CebAe's.com6 e aluating ho' customers like the ne' format for the 'eather information, 'orking 'ith an outside endor to redesign the 'ebsite, and e aluating 'hether the 'aiting time for customers to access the 'ebsite has been reduced.

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(#9 min.) 7"ra"e$#c dec#s#ons and !ana$e!en" acco&n"#n$2

". &he strategies the companies are follo'ing in each case are6 a. Fo' price strategy b. 7ifferentiated product strategy c. Fo' price strategy d. 7ifferentiated product strategy #. 4xamples of information the management accountant can pro ide for each strategic decision follo'. a. .ost to manufacture and sell the cell phone Producti ity, efficiency and cost ad antages relati e to competition Prices of competiti e cell phones 8ensiti ity of target customers to price and /uality &he production capacity of 5oger Phones and its competitors b. .ost to de elop, produce and sell ne' soft'are Premium price that customers 'ould be 'illing to pay due to product uni/ueness Price of basic soft'are Price of closest competiti e soft'are .ash needed to de elop, produce and sell ne' soft'are .ost of producing the *store-brand+ lip gloss Producti ity, efficiency and cost ad antages relati e to competition Prices of competiti e products 8ensiti ity of target customers to price and /uality Go' the market for lip gloss is gro'ing .ost to produce and sell ne' line of gourmet bologna Premium price that customers 'ould be 'illing to pay due to product uni/ueness Price of basic meat product Price of closest competiti e product ("3 min.) Mana$e!en" acco&n"#n$ $&#del#nes2 .ost-benefit approach ?eha ioral and technical considerations 7ifferent costs for different purposes .ost-benefit approach ?eha ioral and technical considerations .ost-benefit approach ?eha ioral and technical considerations 7ifferent costs for different purposes ?eha ioral and technical considerations

c.

d.

1-2* ". #. 1. 2. 3. E. <. H. I.

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("3 min.) Role o% con"roller0 role o% ch#e% %#nanc#al o%%#cer2 Ac"#v#"1 %anaging accounts payable .ommunicating 'ith in estors 8trategic re ie' of different lines of businesses ?udgeting funds for a plant upgrade %anaging the company(s short-term in estments Aegotiating fees 'ith auditors Assessing profitability of arious products 4 aluating the costs and benefits of a ne' product design Con"roller J J J J J J C4O J J

#. As .$!, Perez 'ill be interacting much more 'ith the senior management of the company, the board of directors, auditors, and the external financial community. Any experience he can get 'ith these aspects 'ill help him in his ne' role as .$!. George Perez can be better positioned for his ne' role as .$! by participating in strategy discussions 'ith senior management, by preparing the external in estor communications and press releases under the guidance of the current .$!, by attending courses that focus on the interaction and negotiations bet'een the arious business functions and outside parties such as auditors and, either formally or on the )ob, getting training in issues related to in estments and corporate finance.

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(19 min.) Phar!ace&"#cal co! an10 (&d$e"#n$0 e"h#cs2

". &he o erarching principles of the I%A 8tatement of 4thical Professional Practice are Gonesty, $airness, !b)ecti ity and 5esponsibility. &he statement(s corresponding *8tandards for 4thical .onductK+ re/uire management accountants to Perform professional duties in accordance 'ith rele ant la's, regulations, and technical standards. 5efrain from engaging in any conduct that 'ould pre)udice carrying out duties ethically. .ommunicate information fairly and ob)ecti ely. 7isclose all rele ant information that could reasonably be expected to influence an intended user(s understanding of the reports, analyses, or recommendations.

&he idea of capitalizing some of the company(s 5L7 expenditures is a direct iolation of the I%A(s ethical standards abo e. &his transaction 'ould not be *in accordance 'ith rele ant la's, regulations, and technical standards+. Generally Accepted Accounting Principles re/uire research and de elopment costs to be expensed as incurred. 4 en if Mohnson belie es his transaction is )ustifiable, it iolates the profession(s technical standards and 'ould be unethical. &he other *year-end+ actions occur in many organizations and fall into the *gray+ to *acceptable+ area. %uch depends on the circumstances surrounding each one, ho'e er, such as the follo'ing6 a. Stop all research and development efforts on the drug Lyricon until after year-end. This change would delay the drug going to market y at least si! months. "t is also possi le that in the meantime a PharmaCor competitor could make it to market with a similar drug. Chile this solution may sol e the budget short-fall in this year, it could result in a significant loss of future profits for Pharma.or in the long-run, especially if a competitor is able to obtain a patent on a similar drug before Pharma.or. . Sell off rights to the drug# Markapro. The company had not planned on doing this ecause# under current market conditions# it would get less than fair value. "t would# however# result in a onetime gain that could offset the udget short-fall. $f course# all future profits from Markapro would e lost. Again, this solution may sol e the company(s short-term budget crisisD but could result in the loss of future profits for Pharma.or in the long-run. #. Chile it is not uncommon for companies to sacrifice long-term profits for short-term gains, it may not be in the best interest of the company(s shareholders. In the case of Pharma.or, the .$! is primarily concerned 'ith *maximizing shareholder 'ealth+ in the immediate future (third /uarter only), but not in the long-term. ?ecause this executi e(s incenti e pay and e en employment may be based on his ability to meet short-term targets, he may not be acting in the best interest of the shareholders in the long-run. Mohnson definitely faces an ethical dilemma. It is not unethical on Mohnson(s part to 'ant to please his ne' boss, nor is it unethical that Mohnson 'ants to make a good impression on his "-I

first days at his ne' )obD ho'e er, Mohnson must still act 'ithin the ethical standards re/uired by his profession. &aking illegal and:or unethical action by capitalizing 5L7 to satisfy the demands of his ne' super isor, Mames .lark, is unacceptable. Although not strictly unethical, I 'ould recommend that Mohnson not agree to slo' do'n the 5L7 efforts on Fyricon or sell off the rights to %arkapro. 4ach of these appears to sacrifice the o erall economic interests of Pharma.or for short-run gain. Mohnson should argue against doing this but not resign if .lark insists that these actions be taken. If, ho'e er, .lark asks Mohnson to capitalize 5L7, he should raise this issue 'ith the chair of the Audit .ommittee after informing .lark that he is doing so. If the .$! still insists on Mohnson capitalizing 5L7, he should resign rather than engage in unethical beha ior.

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(19;29 min.) Pro%ess#onal e"h#cs and end-o%-1ear ac"#ons2

". &he possible moti ations for the snack foods di ision 'anting to take end-of-year actions include6 (a) %anagement incenti es. Gourmet $oods may ha e a di ision bonus scheme based on one-year reported di ision earnings. 4fforts to front-end re enue into the current year or transfer costs into the next year can increase this bonus. (b) Promotion opportunities and )ob security. &op management of Gourmet $oods likely 'ill ie' those di ision managers that deli er high reported earnings gro'th rates as being the best prospects for promotion. 7i ision managers 'ho deli er *un'elcome surprises+ may be ie'ed as less capable. (c) 5etain di ision autonomy. If top management of Gourmet $oods adopts a *management by exception+ approach, di isions that report sharp reductions in their earnings gro'th rates may attract a sizable increase in top management super ision. #. &he *8tandards of 4thical .onduct . . . + re/uire management accountants to Perform professional duties in accordance 'ith rele ant la's, regulations, and technical standards. 5efrain from engaging in any conduct that 'ould pre)udice carrying out duties ethically. .ommunicate information fairly and ob)ecti ely.

8e eral of the *end-of-year actions+ clearly are in conflict 'ith these re/uirements and should be ie'ed as unacceptable by &aylor. (b) &he fiscal year-end should be closed on midnight of 7ecember 1". *4xtending+ the close falsely reports next year(s sales as this year(s sales. (c) Altering shipping dates is falsification of the accounting reports. (f) Ad ertisements run in 7ecember should be charged to the current year. &he ad ertising agency is facilitating falsification of the accounting records. &he other *end-of-year actions+ occur in many organizations and fall into the *gray+ to *acceptable+ area. Go'e er, much depends on the circumstances surrounding each one, such as the follo'ing6 (a) If the independent contractor does not do maintenance 'ork in 7ecember, there is no transaction regarding maintenance to record. &he responsibility for ensuring that packaging e/uipment is 'ell maintained is that of the plant manager. &he di ision controller probably can do little more than obser e the absence of a 7ecember maintenance charge. (d) In many organizations, sales are hea ily concentrated in the final 'eeks of the fiscal year-end. If the double bonus is appro ed by the di ision marketing manager, the di ision controller can do little more than obser e the extra bonus paid in 7ecember. (e) If &B spots are reduced in 7ecember, the ad ertising cost in 7ecember 'ill be reduced. &here is no record falsification here. (g) %uch depends on the means of *persuading+ carriers to accept the merchandise. $or example, if an under-the-table payment is in ol ed, or if carriers are pressured to accept merchandise, it is clearly unethical. If, ho'e er, the carrier recei es no extra

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consideration and 'illingly agrees to accept the assignment because it sees potential sales opportunities in 7ecember, the transaction appears ethical. 4ach of the (a), (d), (e), and (g) *end-of-year actions+ may 'ell disad antage Gourmet $oods in the long run. $or example, lack of routine maintenance may lead to subse/uent e/uipment failure. &he di isional controller is 'ell ad ised to raise such issues in meetings 'ith the di ision president. Go'e er, if Gourmet $oods has a rigid set of line:staff distinctions, the di ision president is the one 'ho bears primary responsibility for )ustifying di ision actions to senior corporate officers. 1. If &aylor belie es that 5yan 'ants her to engage in unethical beha ior, she should first directly raise her concerns 'ith 5yan. If 5yan is un'illing to change his re/uest, &aylor should discuss her concerns 'ith the .orporate .ontroller of Gourmet $oods. 8he could also initiate a confidential discussion 'ith an I%A 4thics .ounselor, other impartial ad iser, or her o'n attorney. &aylor also may 'ell ask for a transfer from the snack foods di ision if she percei es 5yan is un'illing to listen to pressure brought by the .orporate .ontroller, .$!, or e en President of Gourmet $oods. In the extreme, she may 'ant to resign if the corporate culture of Gourmet $oods is to re'ard di ision managers 'ho take *end-of-year actions+ that &aylor ie's as unethical and possibly illegal. It 'as precisely actions along the lines of (b), (c), and (f) that caused ?etty Binson, an accountant at Corld.om to be indicted for falsifying Corld.om(s books and misleading in estors.

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1-3. (19 min.) Pro%ess#onal e"h#cs and end-o%-1ear ac"#ons2 ". &he possible moti ations for .ontroller, &odd Allen to modify the di ision(s year-end earnings are6 (i) Mob security and promotion. &he company(s .$! 'ill likely re'ard him for meeting the company(s performance expectations. Alternately, the Allen may be penalized, perhaps e en by losing his )ob if the performance expectations are not met. (ii) %anagement incenti es. Allen(s bonus may be based on the di ision(s ability to meet certain profit targets. If the .onsumer Products di ision has already met its profit target for the year, the .ontroller may personally benefit if ne' printing e/uipment is sold off and replaced 'ith the discarded e/uipment that no longer meets current safety standards, or if operating income is manipulated by /uestionable re enue and:or expense recognition. #. &he o erarching principles of the I%A 8tatement of 4thical Professional Practice are Gonesty, $airness, !b)ecti ity and 5esponsibility. &he statement(s corresponding *8tandards for 4thical .onductK+ re/uire management accountants to Perform professional duties in accordance 'ith rele ant la's, regulations, and technical standards. 5efrain from engaging in any conduct that 'ould pre)udice carrying out duties ethically. .ommunicate information fairly and ob)ecti ely. 7isclose all rele ant information that could reasonably be expected to influence an intended user(s understanding of the reports, analyses, or recommendations. 8e eral of the *year-end+ actions are clearly are in conflict 'ith the statement(s principles and re/uired standards and should be ie'ed as unacceptable. (c) 8ubscription re enue recei ed in 7ecember in ad ance for magazines that 'ill be sent out in Manuary is a liability. 8ho'ing it as re enue falsely reports next year(s re enue as this year(s re enue. (d) 5e ersing the di ision(s Allo'ance for ?ad 7ebt 4xpense 'ould iolate Generally Accepted Accounting Principles unless the bad debt allo'ance is currently o erstated. 5ecording this transaction 'ould result in an o erstatement of income and could potentially mislead in estors. (e) ?ooking ad ertising re enues that relate to Manuary in 7ecember falsely reports next year(s re enue as this year(s re enue. &he other *year-end+ actions occur in many organizations and fall into the *gray+ to *acceptable+ area. %uch depends on the circumstances surrounding each one, ho'e er, such as the follo'ing6 (a) Cancelling two of the division%s least profita le maga&ines# resulting in the layoff of twenty-five employees. Chile employee layoffs may be necessary for the business to sur i e, the layoff decision could result in economic hardship for those employees 'ho lose their )obs, as 'ell as result in employee morale problems for the rest of the di ision. %ost companies 'ould prefer to a oid causing hardship for their existing employees due to layoffs unless absolutely necessary for the sur i al of the business as a 'hole.

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(b) Selling the new printing e'uipment that was purchased in (anuary and replacing it with discarded e'uipment from one of the company%s other divisions. The previously discarded e'uipment no longer meets current safety standards. Again, 'hile this method may result in a short-term solution for the .ontroller and the Production %anager personally, this decision may actually harm the corporation financially as a 'hole, not to mention the potential resulting in)uries to production 'orkers from hazardous e/uipment. &his method 'ould be also be ethically /uestionable and 'ould likely iolate the I%A(s ethical standards of integrity and credibility. (f) Switching from declining alance to straight line depreciation to reduce depreciation e!pense in the current year. %any companies s'itch their depreciation policy from one method to another. 7eacon Publishing could argue that straight-line depreciation better represents the decrease in the economic alue of the asset compared to the declining balance method. 8traight-line depreciation may also be more in line 'ith 'hat its competitors do. If, ho'e er, the company changes to straight-line depreciation 'ith the sole purpose of reducing expenses to meet its profit goals, such beha ior 'ould be unacceptable. &he 8tandards of 4thical ?eha ior re/uire management accountants to communicate information fairly and ob)ecti ely and to carry out duties ethically. 1. Allen should directly raise his concerns first 'ith the .$!, especially if the pressure from the .$! is so great that the only course of action on the part of the controller is to other'ise beha e unethically. If the .$! refuses to change his direction, then the controller should raise these issues 'ith the .4!, and next to the Audit .ommittee and the ?oard of 7irectors, after informing the .$! that he is doing so. &he .ontroller could also initiate a confidential discussion 'ith an I%A 4thics .ounselor, other impartial ad iser, or his:her o'n attorney. In the extreme, the .ontroller may 'ant to resign if the corporate culture of 7eacon Publishing is to re'ard executi es 'ho take year-end actions that the .ontroller ie's as unethical and possibly illegal. It 'as precisely actions along the lines of (c), (d) and (e) that caused ?etty Binson, an accountant at Corld.om, to be indicted for falsifying Corld.om(s books and misleading in estors.

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(29 min.) Glo(al co! an10 e"h#cal challen$es2

". &he o erarching principles of the I%A 8tatement of 4thical Professional Practice are Gonesty, $airness, !b)ecti ity and 5esponsibility. &he statement(s corresponding *8tandards for 4thical .onductK+ re/uire management accountants to Perform professional duties in accordance 'ith rele ant la's, regulations, and technical standards. 5efrain from engaging in any conduct that 'ould pre)udice carrying out duties ethically. .ommunicate information fairly and ob)ecti ely. 7isclose all rele ant information that could reasonably be expected to influence an intended user(s understanding of the reports, analyses, or recommendations. 8e eral of the suggestions made by Gamsen(s staff are clearly in conflict 'ith the statement(s principles and re/uired standards and should be ie'ed as unacceptable. c. Pressure current customers to take early delivery of goods efore the end of the year so that more revenue can e reported on this year%s financial statements. &his tactic, commonly kno'n as channel stuffing, merely results in shifting future period re enues into the current period. &he o erstatement of re enue in the current period may mislead in estor(s to belie e that the company(s financial 'ell being is better than the actual results achie ed. &his practice 'ould iolate the I%A(s standards of credibility and integrity. .hannel stuffing is fre/uently considered a fraudulent practice. e2 )ecord the e!ecutive year-end onus compensation for the current year in the ne!t year when it is paid until after the *ecem er fiscal year-end. Generally Accepted Accounting Principles re/uires expenses to be recorded (accrued) 'hen incurred, not 'hen paid (cash basis accounting). &herefore, failure to record the executi es( yearend bonus 'ould iolate the I%A(s standards of credibility and integrity. %2 )ecogni&e sales revenues on orders received# ut not shipped as of the end of the year. Generally Accepted Accounting Principles re/uires income to be recorded (accrued) 'hen the four criteria of re enue recognition ha e been met6 12 22 32 42 &he company has completed a significant portion of the production and sales effort. &he amount of re enue can by ob)ecti ely measured. &he ma)or portion of the costs has been incurred, and the remaining costs can be reasonably estimated. &he e entual collection of the cash is reasonably assured.

?ecause criteria " and 1 ha e not been met at the time the order is placed the re enue should not be recognized until after year-end. &herefore, recording next year(s re enue in the current year 'ould be a iolation of Generally Accepted Accounting Principles and 'ould be falsifying re enue. &his 'ould be a iolation of the I%A(s standards of credibility and integrity and may be considered fraudulent. &he other *year-end+ actions occur in many organizations and fall into the *gray+ to "-"3

*acceptable+ area. %uch depends on the circumstances surrounding each one, ho'e er, such as the follo'ing6 a2 Stop all transatlantic shipping efforts. The start-up costs for the new operations are hurting current profit margins. Chile this method may result in better short-term financial results for ?redahl, it may do harm to the long-term financial condition of the corporation as a 'hole. (2 Make deep cuts in pricing through the end of the year to generate additional revenue. Again, this is only a short-term tactic to impro e this year(s financial results. In estors may be content in the short-run, but in the long run the ne' shipping company 'ill see reduced margins from these actions. d. Sell-off distri ution e'uipment prior to year-end. The sale would result in one-time gains that could offset the company%s lagging profits. The owned e'uipment could e replaced with leased e'uipment at a lower cost in the current year. Chile this course of action does not necessarily iolate the I%A(s code of ethical standards, it may be only a short-term tactic to impro e this year(s financial results. Gamsen 'ill need to 'eigh his options long-term to make the most cost effecti e decision for his company. $2 +sta lish corporate head'uarters in "reland efore the end of the year# lowering the company%s corporate ta! rate from ,-. to /,.0.. Gamsen may ha e other legitimate reasons for relocating his company to Ireland, but doing so only to reduce his tax liability 'ould likely be considered an e asion of taxes in the company(s home country. Gamsen should seek the ad ice of skilled consultants in the area of international tax before making any such mo e. &he company could face large fines and e en criminal charges for e ading corporate income taxes of the home country. #. It is possible that any of the *year-end+ actions that fall into the *gray+ area may be good for in estors, depending on the credible e idence 'hich supports the management decision. $or example, replacing o'ned e/uipment 'ith leased e/uipment may result in both short-term gains for the company and long-term cost reduction. If so, this decision 'ould be in the best interest of the in estors. If the decision only results in short-term gains, but higher costs in the long-run, then the decision may not be in the best long-term interest of the company(s in estors and should not be implemented solely to prop up short-term earnings. &hose decisions that clearly iolate the I%A code of ethical standards (c, e, and f) 'ould ne er be in the best interest of the in estor. &hese options 'ould result in misleading financial statements and could result in the demise of the company or e en in criminal charges, as 'as the case 'ith companies such as 4nron and Corld.om. If Gamsen asks the management accountant to take any of the actions that are clearly unethical, he should raise this issue 'ith the chair of the Audit .ommittee after informing Gamsen that he is doing so. If Gamsen still insists on the management accountant taking these actions, he should resign rather than engage in unethical beha ior.

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