Question

Carlson's projects inc, Is a manufacturer of a variety of construction products, including insulation, paint, and gypsum. The company has been experiencing steady growth of the past few decades and is moderately profitable.

The Board of Directors at Carlson has developed criteria that all capital budgeting project undertake at Carlson must meet in order to be approved:

1. The project's net value must be positive. The company uses a hurdle rate of 10% when calculating net present value.

2. The project's payback period Must be less than four years.

3. The project's accounting rate of return must be greater than 8%.

Samantha pace is a division manager at Carlson. She's developing a proposal to install solar panels at the company’s Flagstaff Arizona, manufacturing facility. The solar panels, Requiring investment of $1.25 million, will significantly reduce the company's carbon footprint. The project will help the company to save approximately 25% of its current energy costs at that facility. Samantha is excited about this project, both fourths dollar savings in for its sustainability impact. She finalizes the calculations for the capital budget criteria for the solar panel proposal and is delighted to see that her proposal project meets all of the company's capital budgeting criteria. She sent a proposal to Peter Nicholas, the controller for Carlson. Peter Nicholas is responsible for approving all proposed capital budgeting projects that require less than a $2 million investment. Carlson's Board of Directors must approve all capital budgeting projects that require more than a $2 million investment.

Peter Nicholas reviews the solar panel proposal. He thinks it is a promising project and feels that the company should undertake this project and other sustainability projects so that the company can reduce its environmental impact.

As he double checks the calculation and Samantha‘s proposal, he discovers that she has made a few mistakes. Instead of using a hurdle rate of 10%, she actually used a hurdle rate of 6%. She also did not include the impact of the annual depreciation expense for the solar panels in the calculation of ARR. If Peter Nicholas makes the corrections, the solar panel project Will fill the NPV criteria and the ARR criteria.

Peter Nicholas is comforted over what to do. He knows that no one is likely to discover Samantha’s errors in the capital budget and the proposal if he approves it; the errors are not obvious. He really wants to approve the project, since he believes strongly that these types of initiatives are the direction in which Carlson products need to be had in order to remain competitive in the future. He also can rationalize that the impact of the errors is minimal and that the project does not fill the capital budgeting criteria by significant margin. On the other hand he knows that the Board of Directors of Carlson has been rigged and its application of the capital budgeting criteria and the projects it has reviewed.

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

    a. What is/are ethical issues in this situation?

    b. What are Peter's responsibilities as a management accountant? should he approve the solar panel project? Why or why not?

2. Are there any better alternative courses of action that Peter might take to resolve this conflict then to simply approve or reject a proposal? Support your answer.

Answer 1

Capital investment decision

Capital investment decisions are the decisions taken by management to budget a project in such a way that it makes its business objective efficiently and effectively. It helps in further business objectives.

In the present case, company C has very rigid capital budgeting criteria for the projects, division manager S proposes projects which can help the company to be effective and efficient. P reviews the project and finds minor errors in the projects which he thinks not to consider.

1.

a. The ethical issues in this situation are mentioned below-

Competence – This ethical issue states that reviewer P must provide accurate and reliable recommendations and information. The ignorance of mistakes knowingly is considered as a breach of this principle.

Integrity – P is violating the integrity as he was ignoring the errors which might discredit his profession. Any action of the reviewer which affect the real business decisions of the firm is a violation of integrity principle.

Credibility – Credibility means disclosing all the facts and information which helps to understand the report, hence ignoring the errors and not rejecting the project due to the business decision is considered as the violation of this principle.

b.

Being management accountant of a company he must possess the quality of honesty and fairness, he has to report accurate information and reject the proposal on the ground of rigid criteria.

2.

Person P can consult the board of directors and provide a better understanding of the project and its benefits instead of directly rejecting or accepting the proposal. It may increase the chances of acceptance without any unethical decision-making.