1-34 Professional ethics and end-of-year actions. Linda Butler is the new divisi

Question

1-34 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 th 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 w 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. Exte nding 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 Januarys sales to record them as sales in December of the e. Deferring the current period's advertising by reducing the number of television spots run in December and f. Deferring the current period's reported advertising costs by having Daniel Foods' outside advertising current year Giving salespeople a double bonus to exceed December sales targets. running more than planned in January of next year. agency delay billing December advertisements until January of next year or by having the agency alter d. invoices to conceal the December date Persuading carriers to accept merchandise for shipment in December of the current year even thou g. they normally would not have done so

Explanation / Answer

A)

The snack food division president may like to play these end of the year games because of the following

1. he will not be able to show a performance which is consistent with the past performance of the division.

2. His own performance may come under scrutiny if the division does not perform

3. The snack food division has always shown a growth more than the company as a whole and if this division growth slips, the performance of the entire comapny will suffer

B)

1. Deferring December's routine maintenance on packing equipment by an independent contractor until January of next year.

This is acceptable as this is normal accounting practice, even if the cost is incurred in December the benefit is reaped in the next year , hence the cost should be booked in the next year in normal circumstances

2. . Extending the close of the current fiscal year beyond December 31 so that some sales of next year are included in the current year.

This is unacceptable as this is against the integrity standard , as this provides wrong information of the financial numbers and is reporting wrong information willfully

3.Altering dates of shipping documents of next January's sales to record them as sales in December of the current year.

This is unacceptable as willfully forging documents for any benefit is against the credibility and integrity standard . These suggest wrong sales completely and cannot be justified

4. 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.

This is acceptable, as this is planning of cost and matching them with revenue. As the revenue for the current period is not upto the standard , costs like advertisement should be deferred and the expenses on the same should be planned and be in line with the revenue.

Hence this strategy is acceptable and should be done as a good financial controller

5. Deferring the current period's reported advertising costs by having Gourmet Foods' outside advertising agency delay billing December advertisements until January of next year or having the agency alter invoices to conceal the December date.

This is unacceptable , because this is against the integrity standard ,as this is wilfully altering the information for personal gains and misrepresenting the facts and presenting wrong financial numbers and is completely against the standards and ethical standards and has not to be done

C)

Taylor should not give in to the end of the year games which are unacceptable. He is a controller of the division and he is responsible for the correct information of the division. By giving in to these practices , he is not doing his duty . Also he should discuss with the seniors of the organisation so that the matter should be investigated and these unacceptable practices should be stopped across the company.

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