Accounting Methods and Budgetary Pressure
Fasttrack Industries produces and distributes novelty goods in its Northgate Division, which is located in North Carolina’s research triangle region. Fasttrack has been experiencing impressive growth in earnings during most of its existence. However, growth has slowed in recent years and upper management has been pressuring the manager of the Northgate Division, Sam Sully, to meet budgeted profitability goals in the current year.
At the beginning of the current year Sully met with Brett Rice, the vice president of finance for Fasttrack, and expressed frustration about the cost containment issues with the Northgate Division. Rice was very motivated to listen to Sully’s perspective, because Rice genuinely desires success within the Division, since this will translate into beneficial earnings results for Fasttrack overall. Thus, Rice made a proposal to Sully to help alleviate the cost control issues within Northgate, if the operational changes do not improve the level of costs during the first six months of the year.
Costs within Northgate continued to be challenging during the first half of the year, despite changes in the production process. During the mid-year meeting between Rice and Sully an intentional plan was developed by the two individuals. Maintenance and repairs costs for the second half of the year would likely exceed the amounts on the budgeted income statement by $1,000,000. Therefore, the two decided to have all of these recorded into the equipment accounts, since the costs would relate to the general upkeep on these assets. In addition, the two of them decided to delay the recording of cost of goods sold during the month of December, despite the booking of sales revenue for the strongest sales month of the year.
Rice instructed Denise Braxton to work with Sully and cooperate completely with the plan devised to improve the financial results for the Northgate Division. Braxton told Rice that his actions were improper accounting treatments for the proposed procedures. Braxton requested that these procedures not be implemented, but Rice persisted in his demands for Braxton as the director of cost accounting to cooperate completely with Sully.
After clarifying the situation in a confidential discussion with an objective and qualified peer within Northgate, and after failures to convince Sully and Rice to change course, Braxton arranged to meet with Roberts, Fasttrack’s regional general manager. At that meeting, Braxton disclosed the planned accounting arrangements planned by Rice and Sully and successfully gained the support of Roberts.
Â
Required:
Â
1.     Explain why the use of alternative accounting methods (non-GAAP principles) to manipulate reported earnings is both unethical, and illegal, when the company is publicly traded.
2.     Is Denise Braxton, Northgate’s director of cost accounting, correct in saying that the two accounting methods being proposed are improper? Explain.
3.     Assuming these methods are in violation of the IMA’s Statement of Ethical Professional Practice (www.imanet.org), discuss whether Braxton’s actions were appropriate or inappropriate.
Â
4.     Use three Scripture references (in total, not per attribute) from the handout notes and construct a two paragraph proposed plan of action for Denise Braxton to respond to the ethical challenges based upon the integrity and credibility aspects (attributes) of guidelines for the accounting profession designated by the Institute of Management Accountants (IMA).
