PROBLEM 1 - AccuSound Corporation manufactures printed circuits for stereo amplifiers. A common product defect is a "drift" caused by failure to maintain precise heat levels during the production process. Rejects from the 100 percent testing program can be reworked to acceptable levels if the defect is drift. However, in a recent analysis of customer complaints, Marie Allen, the assistant controller, and the quality control engineer determined that normal rework does not bring the circuits up to standard. Sampling showed that about half of the reworked circuits will fail after extended amplifier operation. The incidence of failure in the reworked circuits is projected to be about 10 percent over five years.

Unfortunately, there is no way to determine which reworked circuits will fail, because testing will not detect the problem. The rework process could be changed to correct the problem, but the cost-benefit analysis for the suggested change indicates that it is not economically feasible. AccuSound's marketing analyst has indicated that this problem will have a significant impact on the company's reputation and customer satisfaction. Consequently, the board of directors would interpret this problem as having serious negative implications for the company's profitability.

Allen included the circuit failure and rework problem in her report prepared for the upcoming quarterly meeting of the board of directors. Due to the potential adverse economic impact, Allen followed a long-standing practice of highlighting this information. After reviewing the reports to be presented, the plant manager and his staff complained to the controller that he should control his people better. "We can't upset the board with this kind of material. Tell Allen to tone that down. Maybe we can get it by the board in this meeting and have some time to work on it. People who buy those cheap systems and play them that loud shouldn't expect them to last forever."

The controller called Allen into his office and said, "Marie, you'll have to bury this one. The probable failure of reworks can be mentioned briefly in the oral presentation, but it should not be mentioned or highlighted in the advance material mailed to the board."

Allen feels strongly that the board will be misinformed on a potentially serious loss of income if she follows the controller's orders. Allen discussed the problem with the quality control engineer, who simply remarked, "That's your problem, Marie."

Required:

1. Discuss the ethical considerations that Marie Allen should recognize in deciding how to proceed.

2. Explain what ethical responsibilities should be accepted by (a) the controller, (b) the quality control engineer, and (c) the plant manager.

3. What should Marie Allen do? Explain your answer.

PROBLEM 2 - Urban Elite Apparel designs women's apparel and sells it through retail outlets across the country. All of the company's clothing lines are manufactured by contract manufacturers around the world. A division manager is responsible for each of the company's retail divisions. Each division's controller, assigned by the corporate controller's office, manages the division's accounting system and provides analysis of financial information for the division manager. The division manager evaluates the performance of the division controller and makes recommendations for salary increases and promotions. However, the final responsibility for promotion evaluation and salary increases rests with the corporate controller.

Each of Urban Elite Apparel's divisions is responsible for product design, sales, pricing, operating expenses, and profit. However, corporate management exercises tight control over divisional financial operations. For example, all capital expenditure above a modest amount must be approved by corporate management. The method of financial reporting from the division to corporate headquarters provides further evidence of the degree of financial control. The division manager and the division controller submit to corporate headquarters separate and independent commentary on the financial results of the division. Corporate management states that the division controller is there to provide an independent view of the division's operations, not as a spy.

Required:

1. Discuss the arrangements for line and staff reporting in Urban Elite Apparel.

2. The division manager for Urban Elite Apparel has a "dual reporting" responsibility. The controller is responsible both to the division manager, who makes recommendations on salary and promotion, and to the corporate controller, who has the final say in such matters.

a. Identify and discuss the factors that make the division controller's role difficult in this type of situation.

b. Discuss the effect of the dual reporting relationship on the motivation of the divisional controller

PROBLEM 3 - Progressive Applications Corporation, a developer and distributor of business applications software, has been in business for five years. The company's main products include programs used for list management, billing, and accounting for the mail order shopping business. Progressive's sales have increased steadily to the current level of $25 million per year. The company has 250 employees.

Andrea Nolan joined Progressive approximately one year ago as accounting manager. Nolan's duties include supervision of the company's accounting operations and preparation of the company's financial statements. No one has noticed that in the past six months Progressive's sales have ceased to rise and have actually declined in the two most recent months. This unexpected downturn has resulted in cash shortages. Compounding these problems, Progressive has had to delay the introduction of a new product line due to delays in documentation preparation.

Progressive contracts most of its printing requirements to Web Graphic Inc., a small company owned by Rob Borman. Borman has dedicated a major portion of his printing capacity to Progressive's requirements because Progressive's contracts represent approximately 50 percent of Web Graphic's business. Nolan has known Borman for many years; as a matter of fact, she learned of Progressive's need for an accounting manager through Borman.

While preparing Progressive's most recent financial statements, Nolan became concerned about the company's ability to maintain steady payments to its suppliers; she estimated that payments to all vendors, normally made within 30 days, could exceed 75 days. Nolan is particularly concerned about payments to Web Graphic; she knows that Progressive had recently placed a large order with Web Graphic for the printing of the new product documentation, and she knows that Web Graphic will soon be placing an order for the special paper required for Progressive's documentation. Nolan is considering telling Borman about Progressive's cash problems; however, she is aware that a delay in the printing of the documentation would jeopardize Progressive's new product.

Required:

1. Describe Nolan's ethical responsibilities in this situation.

2. Independent of your answer to requirement (1), assume that Nolan learns that Borman of Web Graphic has decided to postpone the special paper order required for Progressive's printing job; Nolan believes Borman must have heard rumors about Progressive's financial problems from some other source because she has not talked to Borman. Should Nolan tell the appropriate Progressive officials that Borman has postponed the paper order? Explain your answer.

3. Independent of your answers to the first two requirements, assume that Borman has decided to postpone the special paper order because he has learned of Progressive's financial problems from some source other than Nolan. In addition, Nolan realizes that Jim Grason, Progressive's purchasing manager, knows of her friendship with Borman. Now Nolan is concerned that Grason may suspect she told Borman of Progressive's financial problems when Grason finds out Borman has postponed the order. Describe the steps that Nolan should take to resolve this situation.