multiple

INTRODUCTION

Unlike other examples of unethical behavior you might

study, no one described in this case became ridiculously

wealthy or wound up in prison in South America; no one was

sued nor did a business fail. In fact, no one even lost their

job. Yet ethical challenges occurred; the events portrayed

herein have been disguised and fictionalized, but they

largely occurred as described. That is to say, the events of

this “tale” are not fiction but rather historical fact.

A DISAPPOINTING PERFORMANCE EVALUATION

Alan left his performance evaluation confused and a little

angry. He had recently accepted a position at the division

level where he was part of a small group that reported

directly to Doug Stevens, the division accounting and

finance manager (without an intervening accounting

and finance supervisor). This was the first performance

evaluation Alan experienced with his manager.

Alan’s performance evaluation rating was lower than

he had expected, for two reasons. First, Doug told Alan

that he (Doug) was limited in the number of high ratings

he could give employees, so there were not enough high

ratings available for Alan to receive one, too. Second, Doug

reminded Alan that he (Alan) been involved with the Parts

Catalog Solution (PCS) project. From Alan’s perspective, he

had performed his job not only correctly but well; he used the

information he was provided to correctly prepare the financial

forecast and the supporting documentation required by the

upper management review team. Therefore, he was surprised

to learn that his involvement with the project was serving as

a black mark lowering his performance evaluation rating. For

the record, he agreed with neither reason; however, that did

not change his performance evaluation rating.

THE BEGINNING: ALAN AND THE PCS PROJECT

Alan learned about the history of the PCS project from the

project leader, Keith. The tale began quite simply with

a major manufacturer of motorized apparatuses, Green

Engines, announcing that, effective at the end of the year,

the company would no longer supply parts catalogs in a CD

(compact disc) format to its dealers free of charge. It was

April of that very year when Alan had his first meeting with

Keith, who explained that at the end of the year, dealers

would have two choices of products they could use to replace

the free parts catalogs. The first choice would be for dealers

to purchase the digital copies of the same materials from

Green Engines (Green Engines was simply tired of incurring

costs associated with providing this data); this would be the

least-expensive option for dealers and would utilize the same

ordering processes that dealers were already familiar with.

The second choice would be for dealers to subscribe to

a continuously updated online solution. This was a more

expensive option for the dealers but also a more functional

choice. An online solution offered an easier way to find

the desired part(s), and orders could be placed directly via

the online system; there was no need for CD updates or to

separately place orders.

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ISSN 1940-204X

A Tale of Missing...Parts

Nicholas J. Fessler, CMA, CPA The University of Texas at Tyler

© 2 0 1 9 I M A

Alan and Keith were both employed by one of the

three competing companies that had developed an online

solution: More Than Parts, Inc. (MTP), a large, multinational

corporation. MTP had developed an online parts catalog

solution that was already being beta-tested by a limited

number of Green Engines dealers. MTP’s two competitors

were already selling their comparable products to dealers,

so MTP was the slowest competitor getting its product

to the market. Yet PCS was arriving with arguably the

most technologically sophisticated offering of the three

competitors, which would hopefully benefit MTP.

ABOUT ALAN

Alan, the proverbial hero (or perhaps villain) of this tale, had

graduated with a degree in accounting and has worked for

MTP for nearly two years. Before beginning work, he had

taken and passed both the CMA® (certified management

accountant) exam and CPA (certified public accounting)

exam—on his first try, Alan might add—and was currently in

the process of completing the necessary work experience so

he could add those valuable initials to his business cards.1

Alan was working as a financial analyst, a position that

any accounting or finance graduate could apply for; for

example, the colleague in the cubicle next to Alan was an

undergraduate finance major who had been hired directly into

the position he currently held (very similar to Alan’s). Alan was

a little more experienced than this colleague because Alan was

the veteran of a training program and was in his fourth position

at the company. One of the tasks Alan performed in his role

as financial analyst was to provide cost accounting support for

new product proposals, like the PCS project.

THE DEVELOPMENT TEAM FOR THE PCS PROJECT

The PCS development team was a cross-functional group

comprised of a number of individuals.

Alan’s primary source of information was Keith, the

champion of the PCS project. Keith’s education background

was in programming and software development. Keith had

been part of the PCS development team from its inception,

which means that he participated in the two-year-long effort

to develop the software and technology required to make

PCS successful. Keith was energetic, charismatic, intelligent,

and hard-working. For example, during those two years of

development, Keith did not take a vacation. During the

project-approval process, Keith spent a few days at the

beach with his wife and children, but he seemed to leave the

office and take the vacation reluctantly. While on his short

vacation, Keith stayed in contact with the rest of the team,

including Alan, via email and text. Alan thought Keith acted

as though he had staked his career on the success of this

project. Maybe he had; he seemed almost fanatical that MTP

should be in this business. Because Green Engines was no

longer going to supply CD catalogs for free, Keith considered

this a rare opportunity to develop a strong foothold in what

was effectively going to be a new market.

The two other PCS team members that Alan interacted

with were Jane and John; they were technically capable

systems engineers who helped Keith. Like Keith, they had

helped develop the software and technology for the PCS

project; they were currently helping complete the project’s

development and get the project approved by the upper

management review team. After project approval, Jane and

John would assist with the maintenance of the PCS software

and provide technical support to dealers who purchase the

product.

Then there was Alan, the financial analyst, who was

recently added to the team to provide accounting and

finance support for the project-approval process. Alan’s

duty as a financial analyst was to serve the Operations

Division of MTP, Inc., of which Keith was a part. Alan’s

responsibilities included preparing annual budgets, monthly

outlooks, variance analysis, and other special projects for

the Operations Division manager. Alan was also responsible

for providing revenue and cost summaries for new business

proposals like Keith’s—in short, “costing” a project proposal.

Alan was assigned to the development team by Howard,

Alan’s supervisor. Howard was a tall, quiet-spoken man,

perhaps seven years older than Alan. Like Alan, Howard had

been hired by MTP right after college. Alan and Howard

had a good relationship, perhaps in part because they both

were graduates of the same corporate training program for

accounting and finance professionals. Howard respected

Alan and the work he performed on behalf of the operating

division both of them supported.

Alan recalls that the approval-process for the PCS project

lasted many weeks and, on a number of occasions, involved

late nights at work, particularly on those days when Alan

was asked to revise the analysis after 4 p.m. (an effort that

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1 While an important milestone, passing the exams did not mean Alan was yet a CMA or CPA. In addition to passing the exam, both CMA and CPA candidates must acquire the necessary work experience before they can be considered a CMA or CPA (which, for the CPA, differs from state to state). So, while Alan had already passed the CMA exam, he had not yet met the work experience requirement.

typically required several hours of work). Keith, however,

was a charismatic individual and clearly communicated his

appreciation for Alan’s efforts on behalf of the team. Alan

remembers one night, in particular, toward the end of the

project-approval process, when he, Keith, and Jane were

leaving the office about midnight, and Keith told Alan: “I

would be happy to have you on my team any time.”

But consistent with the complexities of modern

business, Alan functioned simultaneously as a member of

two distinct teams. Keith was not Alan’s boss and did not

give him performance evaluations or raises. Neither did

Keith’s manager. Rather Alan reported to his own accounting

and finance organization management hierarchy. Like

many other organizations, businesses, and corporations,

the accounting and finance function at MTP had its own

hierarchy and reporting structure. Financial analysts reported

to a supervisor in the accounting and finance organization

(Alan’s supervisor was Howard). Accounting and finance

supervisors reported to managers in the accounting and

finance organization (Alan and Howard’s manager was Doug

Stevens). Accounting and finance managers reported to the

corporation’s chief financial officer (CFO).

When working late into the night to improve the chance

of success of Keith’s team’s project, it was easy for Alan

to forget that he was a member of not only Keith’s PCS

project team but also Howard’s accounting and finance team.

Alan found project costing to be one of the most fun and

rewarding parts of his job, because he realized that successful

and profitable new business proposals like PCS are critical

to improving the profitability of any company or corporation.

Alan’s role in the process was critical. Accounting and

finance professionals in many organizations are often asked

to provide a gatekeeping function where they are expected

to ensure that the financial information in business forecasts

for new projects is as accurate as possible so that decision-

makers can make the best decisions. At the same time,

however, the primary source of information about new

projects is typically someone outside the accounting and

finance organization—like Keith.

THE FINANCIAL FORECAST, PREPARED BY ALAN

Alan prepared the five-year financial accounting forecasts

used by the upper management review committee to make

a decision about whether or not to approve and fund the

project, using the information provided by Keith. See Figure

1 for a visual summary of the major actors the PCS project

team was interacting with during this project.

Alan remembers that at the time of the case, there were

roughly 1,000 Green Engines dealers in the United States;

most dealers were using the free CD catalogs provided

by Green Engines. Based on information the salespeople

provided to Keith, they estimated that 20% of all dealers

had already subscribed to an online parts catalog product

offered by one of PCS’s competitors. Additionally, the

salespeople and the PCS team expected that 50% of the

remaining dealerships would purchase CD catalogs, while

the other 50% would subscribe to an online parts catalog

from PCS or one of its two other competitors (see Figure 2).

Alan incorporated all of this information into the financial

forecasts. PCS had advantages over its competitors because

MTP’s product was better than that of its competitors

and because MTP was a subsidiary of Green Engines; its

competitors had an advantage over PCS because they had

competing products that were already available on the

market for purchase and use.

Alan knew that other programmers and technical staff

had participated in the two-year development of PCS (in

addition to Keith, Jane, and John), but those individuals

would be moving on to other projects. The development

cost of PCS was not included in the analysis prepared by

Alan, as those costs had been borne elsewhere (and were

economically “sunk” and irrelevant for purposes of the

analysis prepared by Alan).

Yet once the project was approved, salespeople and

additional help desk/support personnel would be added to

the team, and the cost of all those individuals were included

by Alan in the financial forecast. First, seven salespeople

were expected to join the project and would be responsible

for selling PCS to Green Motors dealers. The salespeople

were, practically, “leftovers” from another dealer-targeted

project that was unsuccessful; unfortunately, MTP at the

time did not have a good track record for selling products

like PCS to Green Engines’ dealers. Second, three additional

help desk/support employees would also be added to the

team to assist and support Jane, John, and Keith.

Alan had previously prepared financial forecasts for a

number of other project proposals and knew that a financial

forecast was comprised of many lines of information.

Typically, the first portions of the forecast prepared were

the income statement and balance sheet, which included

expected revenues, expected expenses, and expected

acquisition of assets for the proposed project. The cash flow

effects, and a number of performance measures such as ROI

(return on investment) and NPV (net present value), were

then calculated based on those inputs.

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The information items that Alan used to prepare the

financial forecast for PCS are presented in Figure 3, in the

format of an income statement. It is important to remember that

Alan included only relevant costs in the analysis; that is, only

new revenues and costs that would be created and incurred by

the proposed project were included in the forecast.

Based on the forecast prepared by Alan, the upper

management review committee approved the project, the

sales force and additional help desk/support personnel were

brought on board, and the team went about the business of

selling PCS to as many dealers as possible before the end of

the year.

UNEXPECTED TWISTS AS EVENTS CONTINUED

The first unexpected twist was learned very shortly after

the PCS project’s approval: there was a significant missing

“part” to the analysis prepared by Alan that should have

been included in the original project forecast. The dollar

value of the missing information was large enough that

it, by itself, required approval by the upper management

review committee. Please note that approval by the upper

management review committee was required to receive

funding for new project expenditures in excess of a threshold

amount of US$100,000. Errors in the forecast did not require

approval (although the project manager could be expected to

be held responsible for a project’s success or failure); rather

upper management approval was required because new

(additional) expenditures were being requested that were

not included in the original forecast, and they exceeded the

approval threshold.

Alan prepared the updated the forecast, which was

then formally approved by the upper management review

committee. Yet the rumor mill and Alan’s performance

evaluation conversation with Doug Stevens suggested that

upper management review committee members were not

amused that this information was not included in the original

project proposal; Alan would point out that neither did the

committee members notice the missing information (and

could have noticed and questioned it just as easily as Howard

or Alan). Because the original project proposal was not

memorably profitable, it was unclear how such information

might have changed the original decision; that is, it was

possible that the upper management review committee might

have rejected the project if all relevant financial information

had been included in the original financial forecast.

The second unexpected twist was that as soon as

PCS officially entered the market, “market” prices fell

dramatically because competitors lowered their prices. As

a result, the project was almost immediately less profitable

than had been projected. With the benefit of hindsight, it

is reasonable to expect that when a major new competitor

enters a market that market prices will adjust, but such an

expectation was not incorporated into the forecast.

The third and final unexpected twist was that international

sales, not included in the original forecast, were substantial

and improved the project’s profitability. Green Engines’ sales

were primarily in the United States with the vast majority of

its dealers located in the continental United States. Therefore,

little thought was given to international sales in the original

forecast. A few international dealers existed, however, and

some of them were big (as in, they were among the largest

dealers in the world). Many of those dealers chose to subscribe

to not just one PCS but to five or six of them to use in

multiple locations at the dealer’s large facility.

THE ACTORS

There are three main actors in this story who, in some

combination, were responsible for the missing “part” of the

financial forecast.

The forecast was prepared by Alan. As we learned in

the opening paragraphs, the project was a black mark on his

following performance evaluation.

Howard was Alan’s supervisor at the time of the case, and

he received a demotion (from supervisor to senior financial

analyst) in large part because of his role in this tale. Howard

did not prepare the forecast and trusted Alan’s competency,

but perhaps he could have asked more critical questions

when he reviewed and approved Alan’s work.

Keith was the project champion; he remained on the

team and continued to champion and lead the project,

suffering no ill effects of the project-approval process snafus.

Keith was determined to ensure that the PCS project

occurred. Therefore, with the benefit of hindsight, it seems

reasonable to conjecture that Keith may have been willing to

“stretch” the prospective financial numbers a bit to ensure

the approval of the project, or maybe he “forgot” to tell Alan

about…some parts.

Alan thinks this may very well have occurred. He

remembers that he asked Keith about the information

that later proved “missing” and that Keith claimed those

resources would be transferred to the project from the

cost center where the development effort occurred. That

transfer clearly did not happen, so the PCS project needed

to request additional resources, and a second request for

additional funds was made of the upper management review

committee. Alan does not know whether Keith genuinely

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thought the transfer would occur and then it did not, or

whether Keith intentionally misled Alan. Alan was inclined

to believe that Keith would have been willing to mislead (or

outright lie to) him given Keith’s emotional and professional

investment in the PCS project. Alan continues to claim about

the PCS project: “I did my job right.”

At this point it no longer matters what Alan thinks; but

rather what do you think? Do you think Keith lied to Alan,

or not? Does your opinion of Alan (and Howard) change

depending on whether or not Keith lied?

ASSIGNMENT QUESTIONS

1. What do you think was the missing “part” of the forecast

prepared by Alan? Remember that the dollar amount

was large enough that the missing amount also had to be

approved by the upper management review committee

before the project could continue.

2. What do you think is the most significant ethical issue in

the case? Please explain. Be aware that your answer to this

question should frame your answers to the remaining questions;

that is, this answer should guide your attitudes toward the

characters in the case.

3. Do you feel that Alan and Howard (Alan’s supervisor)

behaved in accordance with the IMA Statement of Ethical

Professional Practice? Why or why not?

4. As a CMA candidate, Alan was subject to the IMA

Statement, as was Howard as a CMA. But Keith was

neither a CMA nor an IMA member and was not subject

to the IMA Statement. Would you hold Alan and Howard

to a different standard of ethical behavior than Keith?

Why or why not?

5. Do you agree with Alan that he “did his job right”? What

do you think Alan should learn from his experience?

6. Largely as a result of the events described in this case,

Alan’s supervisor was demoted but performed none of the

analysis on the PCS project (Alan did). Does this seem

fair or just? Why or why not? Does your answer change

depending on whether Keith was honest or deceitful in

his dealings with Alan?

7. How might the three main actors have applied the IMA

Statement (and its guidelines for Resolving Ethical Issues)

to resolve the ethical issues that occurred? Alternatively,

what could be done by the three main actors, or their

managers, to ensure that the events described in the case

would not occur again?

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ABOUT IMA® (INSTITUTE OF MANAGEMENT ACCOUNTANTS)

IMA®, the association of accountants and financial professionals in business, is one of the largest and most respected associations focused exclusively on advancing the management accounting profession. Globally, IMA supports the profession through research, the CMA® (Certified Management Accountant) program, continuing education, networking and advocacy of the highest ethical business practices. IMA has a global network of more than 100,000 members in 140 countries and 300 professional and student chapters. Headquartered in Montvale, N.J., USA, IMA provides localized services through its four global regions: The Americas, Asia/Pacific, Europe, and Middle East/India. For more information about IMA, please visit www.imanet.org.

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Figure 1: The Groups Involved

More Than Parts (MTP) Upper Management Review Committee

Parts Catalog Solution (PCS) Team

Green Engines Dealers

Green Engines Dealers

Green Engines Dealers

Green Engines Dealers

Green Engines Dealers

$$ (Funding)*Forecast+

Figure 1: THE GROUPS INVOLVED

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Figure 2: The Market

Figure 2: THE MARKET

1,000 Green Engines Dealers in the U.S.:

50% Expected to Purchase CD Catalog from Green Engines

50% Expected to Purchase Online Parts Catalog

from MTP (PCS) or a Competitor

20% Already

Purchased Competing

Online Catalog

Figure 3: FORECASTED INCOME STATEMENT ITEMS

• All information was provided to Alan by Keith • Only relevant revenues and costs were included in the forecast

Revenue 1. All forecasted sales were for U.S. dealers (all salesmen were based in the

U.S.). 2. Estimated that half of all new online parts catalog sales would go to PCS;

effectively a 50 percent market share was expected (in a market inhabited by three competitors).

3. All products were priced at the market price in existence at the time the financial forecast was being prepared (before the actual entry of PCS into the market).

Expense 1. Salary/benefits expense for management (Keith). 2. Salary/benefits expense for helpdesk/support personnel: Jane, John and

three additional employees to be hired. 3. Office space, telephone, and utility expense for the office personnel

(management and helpdesk/support personnel). 4. Salary/benefits expense for the seven member sales force to be hired. 5. Miscellaneous expenses including the costs and upkeep of servers,

website, and database. 6. The salesmen provided their own working space, telephone,

transportation, and computer/internet access out of their compensation (so no expense was included in the forecast for these expenses).

Figure 3: Forecasted Income Statement Items