Prophet Company signed a long-term purchase contract to buy timber from the U.S.
ID: 2575552 • Letter: P
Question
Prophet Company signed a long-term purchase contract to buy timber from the U.S. Forest Service at $300 per thousand board feet. Under these terms, Prophet must cut and pay $6,000,000 for this timber during the next year. Currently, the market value is $250 per thousand board feet. At this rate, the market price is $5,000,000. Jerry Herman, the controller, wants to recognize the loss in value on the year-end financial statements, but the financial vice president, Billie Hands, argues that the loss is temporary and should be ignored. Herman notes that market value has remained near $250 for many months, and he sees no sign of significant change.
Instructions
(a)
What are the ethical issues, if any?
(b)
Is any particular stakeholder harmed by the financial vice president's decision?
(c)
What should the controller do?
Explanation / Answer
answer:
a)
Ethical issues
The deal had a number of unethical issues:
Firstly, the financial vice president fraudulently agreed to pay $ 6,000,000 instead of the market price of $5, 0000,000 for the timber. This is unethical because the financial manager may collude with the seller to rip off the company the extra $1,000,000. As a matter of fact it may just an ill dealing to get the extra cash from the company using the seller as a proxy.
Another unethical issue is the fact that there may be a conflict of interest between the financial vice president and the seller. Due to the fact that the two parties are related, the financial vice president may have to favor the seller in the dealing.
b)
Stakeholder harmed by the financial vice president's decision
The vice president’s financial decision affects the shareholders (investors) of the company. This is because, by increasing the amount of expenses, the vice president is reducing the profitability of the company. Low profitability means low retained earnings. The shareholders will be affected in terms of reduced dividend earned due to the reduced retained earnings.
c)
What the controller should do
The controller should use professional due diligence and integrity to ensure transparency prevails in the dealings. He should therefore ensure that the company does not pay the $6000000 that the financial president agreed to pay. He should offer advice to the vice president on why the deal is inappropriate as far as reducing company expenses is concerned.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.