Question

Ethics Case CT19,5 Steve Morgan, controller for Newton Industries, was reviewing production cost reports for the year. One amount in these reports continued to bother him-advertising. During the year, the company had instituted an expensive advertising campaign to sell some of its slower-moving products. It was still too early to tell whether the advertising campaign was successful. There had been much internal debate as how to report advertising cost. The vice president of Finance argued that advertising costs should be reported as a cost of production, just like direct materials and direct labor. He therefore recommended that this cost be identified as manufacturing overhead and reported as part of inventory costs until sold. Others disagreed. Morgan believed that this cost should be reported as an expense of the current period, so as not to overstate net income. Others argued that it should be reported as prepaid advertising and reported as a current asset. The president finally had to decide the issue. He argued that these costs should be reported as inven tory. His arguments were practical ones. He noted that the company was experiencing financial difficulty and expensing this amount in the current period might jeopardize a planned bond offering. Also, by reporting the advertising costs as inventory rather than as prepaid advertising, less attention would be directed to it by the financial community. Instructions a. Who are the stakeholders in this situation? b. What are the ethical issues involved in this situation? c. What would you do if you were Steve Morgan?

1. identicy ethical violations that occurred.

2. identify stakeholders and the harm caused by the violation.

3. identify alternatives.

Answer 1

1) In the given scenario the employees, investors and shareholders in the company are the stakeholders when the company is preparing for a bond offering. It is important that how company reports at determining the bond price and investor willingness for purchasing the bonds. Moreover the company employees who have no knowledge of the approach in which the books are being kept are also stakeholders. The customers demand for transparency, thus are also stakeholder

2) The approach in which the cost is reported is the prime determiner of the ethical issues. The offered proposals are:

-- Reporting as a part of inventory would inaccurately inflates the valuation of the company, thus deceitful to the investors

-- Reporting it as pre-paid advertising and as a current asset would also give inaccurate results as it depicts that the advertising was completed however unsuccessful

-- Reporting it to current accounting period as an expense and coming up with improved advertising plan shows that for the short term the books would not be completely accurate

3) Although for many honesty is not always the best policy however I believe that the right answer is always the honest approach. I would speak to the President and inform him how the offered proposals can be deceitful and impact on company's reputation. I would also be willing to resign on the spot if he asks so.