Question

Lindell Manufacturing embarked on an ambitious quality program that is centered on continual improvement. This improvement is operationalized by declining quality costs from year to year. Lindell rewards plant managers, production supervisors, and workers with bonuses ranging from $1,000 to $10,000 if their factory meets its annual quality cost goals.

Len Smith, manager of Lindell’s Boise plant, felt obligated to do everything he could to provide this increase to his employees. Accordingly, he has decided to take the following actions during the last quarter of the year to meet the plant’s budgeted quality cost targets:

-Decrease inspections of the process and final product by 50% and transfer inspectors temporarily to quality training programs. Len believes this move will increase the inspectors’ awareness of the importance of quality; also, decreasing inspection will produce significantly less downtime and less rework. By increasing the output and decreasing the costs of internal failure, the plant can meet the budgeted reductions for internal failure costs. Also, by showing an increase in the costs of quality training, the budgeted level for prevention costs can be met.

-Delay replacing and repairing defective products until the beginning of the following year. While this may increase customer dissatisfaction somewhat, Len believes that most customers expect some inconvenience. Besides, the policy of promptly dealing with customers who are dissatisfied could be reinstated in 3 months. In the meantime, the action would significantly reduce the costs of external failure, allowing the plant to meet its budgeted target.

-Cancel scheduled worker visits to customers’ plants. This program, which has been very well received by customers, enables Lindell workers to see just how the machinery they make is used by the customer and also gives them first-hand information on any remaining problems with the machinery. Workers who went on previous customer site visits came back enthusiastic and committed to Lindell’s quality program. Lindell’s quality program staff believes that these visits will reduce defects during the following year.

In your initial post in this discussion: Evaluate Len’s ethical behavior. In this evaluation, consider his concern for his employees. Was he justified in taking the actions described? If not, what should he have done? Assume that the company views Len’s behavior as undesirable. What can the company do to discourage it? Assume that Len is a CMA and a member of the IMA. Refer to the ethical code for management accountants in Chapter 1. Were any of these ethical standards violated?

Answer 1

1. Len should be aware of the bonus for those who achieve the quality goals that have been legally budgeted. In their nature, Len's three actions were manipulative their goal was simply to manipulate the statistics for the benefit of his bonus. As the compensation from Len is obtained at the same time as its workers, one question arises whether he was always involved in them or just his own. The behavior shown by Len is not legal. This denied the self interest for others' well being at the core of ethical behavior. By using manipulative conduct, Len damages the company's reputation and provides customers with poor services and products. In trying to strive to achieve the current year's target in increasing quality, Lens should have emphasized the importance of meeting quality targets. If the objective is not achieved this year, a financially unrewarded incentive for improved performance in the coming year should be added.

2. The company should first and foremost try to employ people with integrity. Firstly, the organization will ensure that management and staff compensation and reward systems are fair and appropriate. So, instead of making a full or no payout, the organization can receive a percentage of cost saved, based on a specified goal. Finally, a proper monitoring system should be introduced to prevent the type of behavior, as Len has, for example, a good internal audit program.

3. Len is responsible for "refraining from behavior which would prejudice ethically fulfilling duties" (III-2) and for "referring to any activity which might discredit his profession or its promotion" (III-3). Len is not in conformity with the ethical code.