Professional ethics and end-of-year actions

Linda Butler is the new division controller of the snack-foods division of Daniel Foods. Daniel Foods has reported a minimum 15% growth in annual earnings for each of the past 5 years. The snack-foods division has reported annual earnings growth of more than 20% each year in this same period. During the current year, the economy went into a recession. The corporate controller estimates a 10% annual earnings growth rate for Daniel Foods this year. One month before the December 31 fiscal year-end of the current year, Butler estimates the snack-foods division will report an annual earnings growth of only 8%. Rex Ray, the snack-foods division president, is not happy, but he notes that the "end-of-year actions" still need to be taken.
Butler makes some inquiries and is able to compile the following list of end-of-year actions that were more or less accepted by the previous division controller:

a. Deferring December's routine monthly maintenance on packaging equipment by an independent con- tractor until January of next year.
b. Extending the close of the current fiscal year beyond December 31 so that some sales of next year are included in the current year.
c. Altering dates of shipping documents of next January's sales to record them as sales in December of the current year.
d. Giving salespeople a double bonus to exceed December sales targets.
e. Deferring the current period's advertising by reducing the number of television spots run in December and running more than planned in January of next year.
f. Deferring the current period's reported advertising costs by having Daniel Foods' outside advertising agency delay billing December advertisements until January of next year or by having the agency alter invoices to conceal the December date.
g. Persuading carriers to accept merchandise for shipment in December of the current year even though they normally would not have done so.

Required:
1. Why might the snack-foods division president want to take these end-of-year actions?
2. Butler is deeply troubled and reads the "Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management" in Exhibit 1- 7 (page 18). Classify each of the end-of-year actions (a–g) as acceptable or unacceptable according to that document.
3. What should Butler do if Ray suggests that these end-of-year actions are taken in every division of Daniel Foods and that she will greatly harm the snack-foods division if she does not cooperate and paint the rosiest picture possible of the division's results?

1. The possible motivations for the snack foods division wanting to take end-of-year actions include:
(a) Management incentives. Daniel Foods may have a division bonus scheme based on one-year reported division earnings. Efforts to front-end revenue into the current year or transfer costs into the next year can increase this bonus.
(b) Promotion opportunities and job security. Top management of Daniel Foods likely will view those division managers who deliver high reported earnings growth rates as being the best prospects for promotion. Division managers who deliver "unwelcome surprises" may be viewed as less capable.
(c) Retain division autonomy. If top management of Daniel Foods adopts a "management by exception" approach, divisions that report sharp reductions in their earnings growth rates may attract a sizable increase in top management supervision.

2. The "Standards of Ethical Conduct . . . " require management accountants to
• Perform professional duties in accordance with relevant laws, regulations, and technical standards.
• Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
• Communicate information fairly and objectively.

Several of the "end-of-year actions" clearly are in conflict with these requirements and should be viewed as unacceptable by Butler.
(b) The fiscal year-end should be closed on midnight of December 31. "Extending" the close falsely reports next year's sales as this year's sales.
(c) Altering shipping dates is falsification of the accounting reports.
(f) Advertisements run in December should be charged to the current year. The advertising agency is facilitating falsification of the accounting records.

The other "end-of-year actions" occur in many organizations and fall into the "gray" to "acceptable" area. However, much depends on the circumstances surrounding each one, such as the following:
(a) If the independent contractor does not do maintenance work in December, there is no transaction regarding maintenance to record. The responsibility for ensuring that packaging equipment is well maintained is that of the plant manager. The division controller probably can do little more than observe the absence of a December maintenance charge.
(d) In many organizations, sales are heavily concentrated in the final weeks of the fiscal year-end. If the double bonus is approved by the division marketing manager, the division controller can do little more than observe the extra bonus paid in December.
(e) If TV spots are reduced in December, the advertising cost in December will be reduced. There is no record falsification here.
(g) Much depends on the means of "persuading" carriers to accept the merchandise. For example, if an under-the-table payment is involved, or if carriers are pressured to accept merchandise, it is clearly unethical. If, however, the carrier receives no extra consideration and willingly agrees to accept the assignment because it sees potential sales opportunities in December, the transaction appears ethical.

Each of the (a), (d), (e), and (g) "end-of-year actions" may well disadvantage Daniel Foods in the long run. For example, lack of routine maintenance may lead to subsequent equipment failure. The divisional controller is well advised to raise such issues in meetings with the division president. However, if Daniel Foods has a rigid set of line/staff distinctions, the division president is the one who bears primary responsibility for justifying division actions to senior corporate officers.

3. If Butler believes that Ray wants her to engage in unethical behavior, she should first directly raise her concerns with Ray. If Ray is unwilling to change his request, Butler should discuss her concerns with the Corporate Controller of Daniel Foods. She could also initiate a confidential discussion with an IMA Ethics Counselor, other impartial adviser, or her own attorney. Butler also may well ask for a transfer from the snack foods division if she perceives Ray is unwilling to listen to pressure brought by the Corporate Controller, CFO, or even President of Daniel Foods. In the extreme, she may want to resign if the corporate culture of Daniel Foods is to reward division managers who take "end-of-year actions" that Butler views as unethical and possibly illegal. It was precisely actions along the lines of (b), (c), and (f) that caused Betty Vinson, an accountant at WorldCom, to be indicted for falsifying WorldCom's books and misleading investors.