Prophet Company signed a long-term purchase contract to buy timber from the U.S.
ID: 368272 • 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
This is a typical case where an organization takes an order at a value which does not cover the costs needed to fulfil the order. Here, the company in question is paying $50 more per thousand feet for the timber that they are buying. Now, let us get to the questions:
Q1. What are the ethical issues, if any?
This is a slightly tricky question. This is more of a gray area. There would have been serious ethical issues if we had been given evidence of any form of bribery. However, that is not the case. Here, the organization has agreed to buy timber at a rate which is above market rate in the form of a long term contract. Ideally, this should be informed to all relevant stakeholders by identifying this as a loss in the respective P&L statements, as an organization is answerable to its shareholders. However, the Vice President is against doing this. This indicates lack of transparency within the top levels of the organization
b) Is any particular stakeholder harmed by the VP's decision?
Yes, there are many stakeholders who are harmed by this decision. In fact, all the employees will be impacted by this decision as all of their benefits will be decided by the cash flows of the organization, and that has been hit because of this decision. However, key stakeholders who have been hit by this decision would be the investors/shareholders who expect returns based on the figures projected by the company (these are now no longer true figures as the VP has decided against transparency)
c) What should the controller do?
The controller should insisnt on proper documentation. If the VP does not want this deal to reflect in the financial statements, it should be in written either via e-mail or some form of documentation. If the VP has a proper rationale or a justification, let it be in writing so that everything about this deal is on record, and the reasoning and thought process behind this move is clearly recorded with proper sign offs.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.