Case-A Faulty Budget

Jackson Daniels graduated from Lynchberg State College two years ago. Since graduating from the college, he has worked in the accounting department of Lynchberg Manufacturing. Daniels was recently asked to prepare a sales budget for the year 2011. He conducted a thorough analysis and came out with projected sales of 250,000 units of product. That represents a 25 percent increase over 2010.

Daniels went to lunch with his best friend, Jonathan Walker, to celebrate the completion of his first solo job. Walker noticed Daniels seemed very distant. He asked what the matter was. Daniels stroked his chin, ran his hand through his bushy, black hair, took another drink of scotch, and looked straight into the eyes of his friend of 20 years. “Jon, I think I made a mistake with the budget.”

“What do you mean?” Walker answered.

“You know how we developed a new process to manufacture soaking tanks to keep the ingredients fresh?”

“Yes,” Walker answered.

“Well, I projected twice the level of sales for that product than will likely occur.”

“Are you sure?” Walker asked.

“I checked my numbers. I'm sure. It was just a mistake on my part,” Daniels replied.

“So, what are you going to do about it?” asked Walker.

“I think I should report it to Pete. He's the one who acted on the numbers to hire additional workers to produce the soaking tanks,” Daniels said.

“Wait a second,” Walker said. “How do you know there won't be extra demand for the product? You and I both know demand is a tricky number to project especially when a new product comes on the market. Why don't you sit back and wait to see what happens?”

“But what happens if I'm right and the sales numbers were wrong? What happens if the demand does not increase beyond what I now know to be the correct projected level?” Daniels asks. “Well, you can tell Pete about it at that time. Why raise a red flag now when there may be no need?” Walker states.

As the lunch comes to a conclusion, Walker pulls Daniels aside and says, “Jack, this could mean your job. If I were in your position I'd protect my own interests first.

Part II

Complete Case 1-8: A Faulty Budget, 2 Pages.

Read the above case and write up an executive summary on the case, including answers to the following questions.

Describe the legal and ethical issues surrounding the case.

Would your answers change if these budget errors would not affect other aspects of the business operations?

Assuming that the reporting person for this case is a CPA, what ethical standards can you identify in this situation?

Include your opinions and explain the accountant's professional ethical obligation to integrate the ethical framework among corporate management, ethical behavior, and business ethical practice.