Question

The Front Corporation is an integrated food processing company that has operations in over two dozen countries. Front’s corporate headquarters is in Dallas, and the company’s executives frequently travel to visit Front’s foreign and domestic facilities. Front has a fleet of aircraft that consists of two business jets with international range and six smaller turboprop aircraft that are used on shorter flights. Company policy is to assign aircraft to trips on the basis of minimizing cost, but the practice is to assign the aircraft based on the organizational rank of the traveler. Front offers its aircraft for short term lease or for charter by other organizations whenever Front itself does not plan to use the aircraft. Front surveys the market often in order to keep its lease and charter rates competitive. David Easy, Front’s vice president of finance, has claimed that a third business jet can be justified financially. However some people in the controller’s office have surmised that the real reason for a third business jet was to upgrade the aircraft used by Easy. Presently, the people outranking Easy keep the two business jets busy with the result that Easy usually flies in the smaller turboprop aircraft. The third business jet would cost $11million. A capital expenditure of this magnitude requires a formal proposal with projected cash flows ad net present value computations using Front’s minimum required rate of return. If Front’s president and the finance committee of the board of directors approve the proposal, it will be submitted to the full board of directors. The board has final approval on capital expenditures exceeding $5 million and has established a firm policy of rejecting any discretionary proposal that has a negative net present value. Easy asked Rhonda Adams, assistant corporate controller, to prepare a proposal on a third business jet. Adams gathered the following data: 1. Acquisition cost of the aircraft, including instrumentation and interior furnishing. 2. Operating cost of the aircraft for company use. 3. Projected avoidable commercial airfare and other avoidable costs from company use of the plane. 4. Projected value of executive time saved by using the third business jet. 5. Projected contribution margin from incremental lease and charter activity. 6. Estimated resale value of the aircraft. When Easy reviewed Adam’s completed proposal and saw the large negative net present value figure, he returned the proposal to Adams. With a glare, Easy commented, “You must have made an error. The proposal should look better than that.” Feeling some pressure, Adams went back and checked her computations; she found no errors. However, Easy’s message was clear. Adams discarded her projections that she believed were reasonable and replaced them with figures that had a remote chance of actually occurring but were more favorable to the proposal. For example, she used first class airfares to refigure the avoidable commercial airfare costs, even though company policy was to fly coach. She found revising the proposal to be distressing. The revised proposal still had a negative net present value. Easy’s anger was evident as he told Adams to revise the proposal again, and to start with a $100,000 positive net present value and work backwards to compute supporting projections. Required: 1. Explain weather Rhonda Adams’ revision of the proposal was in violations of the IMA’s Statement of Ethical Professional Practice. 2. Was David Easy in violation of the IMA’s Statement of Ethical Professional Practice? Explain your answer. 3. Identify specific internal controls that Front Corporation could implement and explain how the control will prevent unethical behavior on the part of the vice president of finance.

Answer 1

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