Creative Accounting
By Prof. Eva Z. Quiñones
The BuenasCosas Corporation has had an average yearly increase in Gross Profit Margin (GPM) of 10% over the last 5 years. This year's quarterly report shows a 2% GMP increase, and management expects a decrease in GMP for the last quarter of the year.
Concerned about these reports, the general manager decides to hold a meeting with the operations managers and the comptroller to discuss the third quarter report and find ways of stopping the current downward GMP path.
The operations manager recommends obtaining better control over product costs by using ABC Costing and Total Quality Management. He argues that controlling product costs is of paramount importance since an increase in selling price would lose substantial market share given the current highly competitive market.
The comptroller has a different suggestion: to change the inventory method to one that can decrease the reported Cost of Goods Sold.
After these suggestions were laid out, the three begin to debate the options available:
Operations Manager:
We have been using the same inventory method for many years and have received good results from it. Why fix something that isn't broken?"
Comptroller:
There is nothing wrong with the present inventory method. However, a change in the accounting method for inventory can increase profits or at least appear to do so.
General Manager:
The external auditor will notice the change in inventory method. We have gotten clean reports from them in the past. Do we really want to place our good reputation in jeopardy?
Comptroller:
Professional accounting standards allow us to change accounting methods, although they tend to encourage overall consistency. We only need to show that the new method is preferable in some way. Then we must disclose the effects of the change in the financial statements.
Operations Manager:
From what I remember of my accounting courses in college, we need to disclose the effect of the change on the previous years also. This could have a negative impact on the amounts reported in these years.
Comptroller:
We can choose a method that will have a positive impact in profits of the previous years and in the current year. The accounting team can then justify the change and make the necessary calculations.
General Manager:
It sounds good to me. The accounting change in the inventory method will solve our immediate problem. In addition, we will have enough time to find alternatives to improve operations for next year. So go ahead and make all the necessary calculations. We need to improve the GMP by the end of the year.
Analyzing Ethical issues can best be addressed by developing a formal reasoning or model following certain prescribed steps:
1. Clarify the facts: What do we know, or what needs to be known to clearly state the problem, such as who, what, when, and how.
2. Define the Ethical issue: what is the situation causing the ethical issues to raise? Who are the stakeholders involved (be specific don't generalize in identifying the stakeholder groups)? Are we dealing with rights, fairness, or integrity issues?
3. Specify the alternatives: List possible courses of action and identify any potential compromises.
4. Compare values and the alternatives: is there one compelling solution or clear decision?
5. 5. Assess the consequences: identify the pros and cons, short-term vs long-term solutions for the identified alternatives. Look at cost-benefit analysis for the consequences identified.
6. Make a decision: balance the consequences against a primary ethical principle or value and select the best fit.