Case Study: Bonnie Morgen: First Day on the Job and Facing an Ethical Dilemma

Bonnie Morgen: First Day on the Job and Facing an Ethical Dilemma

Case

Author: Barbara Lamberton Online Pub Date: January 02, 2019 | Original Pub. Date: 2018 Subject: Financial Reporting, Business Ethics Level: Intermediate | Type: Experience case | Length: 1120 words Copyright: © 2018 IMA Educational Case Journal. All rights reserved. Organization: fictional/disguised | Organization size: Region: Global | State: Industry: Manufacturing Originally Published in: Lamberton, B. (2018). Bonnie Morgen: First day on the job and facing an ethical dilemma. IMA Education Case Journal, 11(1), Article 2. Publisher: Institute of Management Accountants DOI: http://dx.doi.org/10.4135/9781526490650 | Online ISBN: 9781526490650

© 2018 IMA Educational Case Journal. All rights reserved.

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Page 2 of 5 Bonnie Morgen: First Day on the Job and Facing an Ethical Dilemma

Abstract

The case presents an accounting ethical dilemma where the controller of a business unit that produces and sells industrial components must decide what to do when her boss misrepresents orders as sales to meet sales budgets and thus overstates revenues by one and a half million dollars.

Case

Introduction

Today is Bonnie Morgen’s first day on the job as controller of a business unit that produces and sells industrial components. She has been with the company for a number of years and most recently worked at headquar- ters, working directly for CFO Ed Judsen. Bonnie is replacing Jerry Mayfare, who recently left the company for another opportunity. Jerry’s previous work experience included 10 years of working at an entrepreneurial venture. Bonnie had heard that Jerry prided himself on not having a lot of formal accounting training.

Starting today, Bonnie will work directly for Bill Ridgefield, the division general manager (GM), but she will still have responsibility to Ed. Although company policy dictates that both the GM and CFO have input in the con- troller’s performance evaluation, the GM’s input has greater weight for both the annual review and pay raises. Bill has a reputation as a personable and talented GM, having started with the company 20 years ago as a sales management trainee and having progressed through increasingly responsible positions. Ed started with the company as an accounting trainee about the same time as Bill and was promoted to CFO five years ago.

Bonnie is settling into her new office when Rich, the senior accounting supervisor, walks into her office and closes the door with last month’s financial statements in his hands. Bonnie wants to review them in detail, because this is the last month of the fiscal year. Rich is well respected, has been with the company for five years, and has a solid background in both auditing and manufacturing.

Bonnie: Rich, sit down. You look troubled.

Rich: Yes, the internal forecast we prepared last month for Jerry and Bill showed us missing the budgeted income this year. My analysis showed that an unexpected raw material price increase combined with the work stoppage at one of our biggest customers explains most of the shortfall. Jerry claimed that he was being pres- sured by Bill, so his solution was to play some games.

Bonnie: Let’s face it—Bill can be quite intimidating with someone easily browbeaten, especially if they cannot justify his or her position on an issue. Some big bonuses are on the line, and everything rides on meeting the budgeted profit. Personally, I think the criteria for bonuses and promotions puts too much emphasis on meeting the budget. That can make it hard to stand up against any “creative accounting.” But, that is part of the job.

Rich: Well, apparently Jerry felt he had to do something.

Bonnie: Bill must have scared him. (Laughing) You know Gary at headquarters? He used to work for Bill. Gary loves to tell the story about dealing with Bill when the forecast showed that the budget would be missed. The story goes that Bill asked a ton of very relevant questions, and Gary answered every one of them. Bill then joked that Gary should not record depreciation for the month so that the budgeted profit target would be met. Even though Bill’s tone made it clear that it was a joke, Gary said that he made sure not to smile. Instead

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Page 3 of 5 Bonnie Morgen: First Day on the Job and Facing an Ethical Dilemma

he told Bill that that the profit plan targets would not be met through accounting tricks. So, what did Jerry do?

Rich: He booked some new orders as sales.

Bonnie: What! The lead time would mean that those orders would not be completed and shipped for months—until early next year. What was Jerry thinking?

Rich: He did not care. More than once I heard him say that he was a big-picture guy, and no one should expect him to learn about the detailed accounting rules.

Bonnie: Yeah, I heard something about that at headquarters. Someone needs to look at the selection and hiring process. I know the job description for my position is not that well defined. So, what justification did he give for his action?

Rich: He said an order is as good as a sale, and they would eventually be manufactured and shipped. It was only a slight timing issue.

Bonnie: Did you try to talk him out of it?

Rich: Yeah, but Jerry was not someone to cross. The environment here has become quite caustic under Jer- ry’s leadership. Earlier in the year, Jerry tried to pressure Tammy to hold back some bills and told her not to accrue them. She flat out refused. When we ended up missing the budget, Jerry wrote her up for insubordi- nation.

Bonnie: Is that why Tammy transferred out?

Rich: I suspect so. Unlike Tammy, I cannot afford to make waves or change jobs right now. Jerry was letting me work at home some days so that I could care for my kids when my wife had to go in for her medical treat- ments.

Bonnie: How is Jane coming along?

Rich: The doctors are cautiously optimistic. Thanks for asking. But, back to the Jerry issue. I told him that I was not comfortable recording those orders as sales, since doing so would be a blatant violation of revenue recognition rules. I tried to be less confrontational than Tammy would have been under the same circum- stances.

Bonnie: Exactly what did he do then?

Rich: He told me to stop being such a “bean counter” type and look at the big picture. He then hand selected some newly arrived orders and recorded them himself as completed sales.

Bonnie: What’s the damage? How far off are last month’s reported results.

Rich: Not trivial any way you look at it, qualitatively or quantitatively. Booking those orders resulted in a mate- rial overstatement of last month’s income of $121,171 and an overstatement of revenue by $1,514,643. Plus, we are essentially stealing sales from next year. I have the files here.

Bonnie: Did you go to Bill once you saw that Jerry would not change his mind?

Rich: Before we knew it Jerry was gone, and you were replacing him. I figured I would lay the whole thing out for you.

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Assignment Questions

Answer Questions 1 to 5 from Bonnie’s perspective. Please watch the word limitations. An outline format for the answers is acceptable.

1. In 100 words or less, describe the ethical dilemma. 2. In 100 words or less, explain how organizational culture may have influenced and con-

tributed to the ethical dilemma identified in Question 1. 3. In 100 words or less, based on the IMA® (Institute of Management Accountants) State-

ment of Ethical Professional Practice, identify the standard(s) that would be violated if Bonnie ignored the ethical dilemma identified in Question 1.

4. Identify and describe alternative course(s) of action for Bonnie. 5. Recommend a course of action for Bonnie, a member of IMA.

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