The case of manipulation with the reported earnings exposes an ethical problem of alternative accounting methods. In this situation, Gonzales makes a number of decisions that cannot be considered appropriate. First of all, the choice to create a situation where the reported income is even higher than the real one is made by Gonzales on the basis of her own thought process. According to Dugan and Taylor (2016), accountants often have to make reporting decisions while relying on their own judgment. It is possible that the choice of Gonzales to make an arrangement with the P&R falls into this category as she does not consult anyone else about this issue. Furthermore, Gonzales’ attempt to move the expenditures to another year does not describe the company’s actual expenses, which misrepresents the company’s financial situation. Therefore, it is possible that while the immediate outcomes of this decision may not be significant, the future results may damage the business.
The pressure that made Gonzales act in such a way will most likely exit the following year as well. Therefore, her actions do not resolve the situation as a whole, creating a temporary and questionable solution instead. According to Shafer (2015), accounting managers are often put under pressure to show an increasingly excellent performance year after year, which further exacerbates the situation in which Gonzales has placed herself. Moreover, the current increase in profits may be a solid foundation for the bonus payment, which alleviates the need to change the financial statements further. In fact, the choice of the vice president of finance to make this arrangement may be considered illegal as it is a blatant manipulation of factual information, which may affect future expenditures and damage the company’s growth the following year.
In his reaction to the unexpected financial reports, Wood is correct to state that the results of accounting were incorrect. The difference between perishable supplies and equipment is significant as these types of materials have different usage properties. First of all, supplies should be covered separately as they do not function in the same way as other equipment. The utilization period of the latter may last for an extended period of time and require other expenses, while the usage of supplies is not as prolonged as they cannot be maintained or repurposed in any way. That is why they are perishable. Thus, by pointing out this mistake, Wood shows that these types of products that P&R supplies cannot fall under one category. Moreover, it is clear from the case that the division manager has a set of limitations for operating expenses. Supplies cannot be included in the category of capital expenditures as they do not belong there because of their properties.
Wood’s actions regarding the arrangement proposed by Gonzales can be considered appropriate according to the IMA’s Statement of Ethical Professional Practice. After seeing the financial reports, Wood contacted his superior, Gonzales. This action is ethical as he openly reached out to the person of a higher level of authority before taking any action. As the Institute of Management Accountants (2017) states, “the resolution process could include a discussion with the member’s immediate supervisor.” Furthermore, the Statement discusses the issue of the supervisor’s involvement in the conflict and notes that one can present the problem to the next level of management. In this case, Wood contacted Lin, the division manager of Belco, who could be considered the next person in the chain of authority in the company. However, the discussion that Wood had with a peer from Belco was rather questionable as he possibly breached the standard of confidentiality. It is unclear whether this person was involved in the financial operations that were directly connected to the issue, which makes this particular decision somewhat unethical. Nevertheless, Wood’s course of actions corresponded with the IMA’s Statement of Ethical Professional Practice.
References
Dugan, M. T., & Taylor, G. (2016). Ethical Issues related to earnings management: An instructional case. Journal of the International Academy for Case Studies, 22(3), 84-89.
Institute of Management Accountants. (2017). IMA Statement of Ethical Professional Practice. Web.
Shafer, W. E. (2015). Ethical climate, social responsibility, and earnings management. Journal of Business Ethics, 126(1), 43-60.