Question

G company, publicly held corporation, operates a regional chain of large drug stores. Each drugstore is operated by a general manager in a controller. The general manager is responsible for the day-to-day operations of the store, while the controller is responsible for the budget and other financial tasks. The general manager, Tracey Kappan, has been at G Company for several years. Employee turnover is high at G company, just as it is in the retail industry in general. Kappan just hired a new controller, Min Yang. 

Yang was asked to prepare the master budget. Each retail location prepares its master budget once a year and then submit the budget to company headquarters for approval. Once approved by headquarters a master budget is used to evaluate the store's performance. These performance evaluations directly affect The managers bonuses and whether additional companies funds are invested in that location.

When Yang was almost done preparing the budget, Kappan instructed him to increase the amount budgeted for labor and supplies by 20%. When asked why, Kappan responded that the budgetary cushion gives store management flexibility in running the store. For example, because company headquarters tightly controls operating funds in capital improvement funds, any extra money budgeted for labor and supplies can be used to replace store furnishings or to pay bonuses to help to retain good employees. She explains that the chance of getting extra funds from company headquarters is not good; this cushion is usually the only opportunity to replace store decor or to pay bonuses to key employees. Kappan also needs extra funds occasionally to make under the table payments to employees as incentives to work extra hours or to keep them from leaving for a higher paying job.

Yang feels complicated. He’s eager to please Kappan, and he’s wondering what he should do in the situation. 

1. Using the IMA Statement of ethical professional practice as an ethical framework, answer the following questions:

What are the ethical issue(s) in this situation?

What are Yang's responsibilities as a management accountant? 

2. Would your answer differ if G company were instead owned by one individual instead of being publicly held? Why or why not? 

3. Would anyone be harmed if slack were to be built into the budget? Why or why not?

4. Discuss the specific steps Yang should take in this situation. Refer to the IMA statement of ethical professional practice in your response. 

Answer 1

Ethical Standards:

The principles and standards developed by Institute of Management Accountants to help management accountants deal with ethical challenges to remind the accountants that society expects professional accountants to exhibit the highest level of ethical behavior.

Competence:

It is the responsibility of the person to continue an appropriate level of professional expertise by the continual development of skills and knowledge. Perform the professional duties in accordance with the relevant regulations, laws, and technical standards.

Credibility:

It is the responsibility of the person to communicate the information honestly and objectively and disclose all the appropriate information, that could reasonably affect the intended users understand the reports, analyses or recommendations.

Integrity:

It is the responsibility of the person to mitigate the conflict of interests, refrain from any engagement in any conduct that would prejudice on ethical conduct of the duties and abstain any engagement and support of any activity that might discredit the profession.

Confidentiality:

It is the responsibility of the person to retain the information confidential except when disclosure is required by law and refrain the use of confidential information for unethical or illegal advantage.

1.

It should be the practice of the managerial accountant to follow the norms of IMA and behave ethically. He must not engage in such activities which require him to behave unethically. Therefore, Y should be responsible to perform his duties and responsibilities ethically.

a.

The ethical issues in this situation are:

Competence: The members should maintain professional expertise. They must adhere and perform their duties in accordance with prescribed standards and laws. If Y increases the budgeted expenses of labor and supplies, Y has violated the legal rules of reporting.

Integrity: Each member must communicate with other business representatives and thus avoid any conflict of interest. If Y purposely overstating the expenses of labor and supplies, it would be said as Y has discredited the profession.

Credibility: Member must represent the true and fair view of financial statements as well as other information to its users as it may affect their decision making. In the present case, if Y is not providing the fair information as Y would inflate the amount of expenses and this may affect the intended users of the report.

b.

Y’s responsibility as a management accountant in such situation is to prepare the budget objectively and honestly. Y should report the accurate information while preparing the budget.

2.

The responsibilities of management accountant are not based on the ownership of the organization. Therefore, it can be said as management should report accurate and fair information while preparing the budget irrespective of the organization is owned by an individual or publicly held.

3.

By reporting the inflated expenses in the budget of a store, the whole organization would be harmed. By doing so, the store removes money from the pool available for other stores and this would result in demotivated for employees of other stores of the organization.

4.

Y should prepare the budget accurately and fairly by avoiding the conflict of interest. On the other hand, Y also discusses with the senior or HR branch about the present situation of being pressurized by the manager to do the unethical work.