Bennie Gordon is a CPA and a member of the AICPA. Gordon works as an accounting manager at the division level at Jet Energy Company, a publicly owned company headquartered in South Carolina.
Jet Energy is a regulated utility company by the state and provides electricity to 7 million customers in southern states. Jet Energy is allowed a rate of return on operating income at a maximum rate of 12.5 percent on electricity it sells. If the company is earning more than that, regulators can cut the rate that it charges to customers. Gordon reports to Sarah Higgins, the controller of the division. Higgins holds the Certificate in Management Accounting (CMA) and is a member of the IMA. Higgins reports to Sam Thornton, the chief financial officer, who is a CPA.
In turn, Thornton reports to Vanessa Jones, the CEO of the company. Joan Franks is the chief compliance officer. The company has an audit committee of three members, all of whom sit on the board of directors. Gordon has identified irregular accounting entries dealing with the reclassification of some accounting items to make its returns lower so state regulators would not cut rates.
One example is that Jet Energy often gets rebates from insurers of its nuclear plants based on safety records. Although the cost of the premiums is expensed to the electricity business, the rebates-approximately $26 million to $30.5 million each-were not booked back to the same accounts. On a number of occasions, they were booked below operating income in a nonoperating account. The moves kept Jet Energy from exceeding its allowable returns and kept the states from reducing electricity rates. After two years of being silent, Gordon decided it was time to address the issue.
Questions
1. What steps should Bennie Gordon take to ensure that the accounting matter is adequately addressed by the company? Why do you suggest those
2. Assume that Gordon made a strong case that the accounting did not comply with GAAP, but his superiors said that the decisions already made were final. They never offered an explanation. What would you do next if you were Gordon? Would you blow the whistle and, if so, how would you do it? Explain your answer in terms of ethical reasoning.