Ethics Challenge

ETHICS CHALLENGE

1.  Assuming that Atkins and Granger work on some type of bonus or commission based on meeting and/or exceeding their respective sales or production goals, they are incentivized to factor slack into their budgets. Instead of basing their budget projections on past performance data, they are understating the revenue they except to generate or overstating anticipated expenses in order to exceed their numbers so as to receive bigger bonuses. This is the only benefit they will realize from doing this.

In the first couple of years Atkins and Granger provide budgets with monetary slack built in, there will not be any red flags to indicate they are deliberately understating their projections. As they continue to do this year after year, upper management will begin to notice a drop in the company’s performance when compared to competitors with a similar size and footprint in the industry. They will also begin to notice an unexplained drop in the profitability of the company. When top management decides to look at the company operations from top to bottom, this will eventually come to the surface. If it has been occurring for several years, Atkins and Granger will more than likely be looking for new jobs when it is discovered what they are doing. This is one of the downfalls of participative budgeting with no one in accounting paying attention to what the different divisions are doing when forecasting budgets for the next year.

2.  The approach Atkins and Granger are taking is clearly unethical when applying the standards as set forth in the ‘IMA Statement of Ethical Professional Practice’. Since they are not accountants or versed in accounting standards and practices, they may not be aware this is the case. They are only looking out for themselves so they may not be aware of what is ethical and what is not. They fall short in three areas of the IMA Statement.

The first standard where they fall short is competence. Apparently they have not received proper training in what they should and should not do when forecasting budgets. If they have been applying budgetary slack for some time and getting away with it, their behavior will continue as it has. This would also indicate the person who reviews the budget proposal they submit is not properly identifying that there might be an issue so this person may not be competent as well. It could also be they are all aware, but do not care, as long as they all make and exceed their numbers.

The second standard they fall short in is integrity. By factoring in budgetary slack they are in essence creating a conflict of interest where they are placing their needs and wants over that of the employer. It does not sound like they are informing everyone involved in the budgetary process that this is happening since upper management has allowed it to continue. This is indicated by Granger’s statement that he thinks everyone does it. This goes back to competence in that they may not have been properly trained in forecasting budgets.

The last standard violated is credibility. By looking out for themselves they are going to lose credibility with mid and upper management when it comes to light what they have been doing. If other departments have been forecasting their budgets properly and thereby have not received the bonuses Granger and Atkins have received, there will be resentment created with their peers. Management may be upset that they have paid out large bonuses to these two due to the ‘numbers’ being manipulated, as well as performance of the company dropping and profits not meeting expectations. No one will really trust Granger or Adkins after this. Once trust is lost, it is time to move on since no one will really want to work with or around you.

COMMUNICATING IN PRACTICE

1. More information on each of the departments and how they have been treated in the past would need to be looked at in making this difficult decision. A look needs to be taken at what departments bring positive attention and possibly money into the institution to help supplement the subsidies the state pays, and what departments are a proverbial ‘black hole’ where money keeps going in but nothing tangible appears to be come out. Another look needs to be taken at how each department has historically handled their budgets in both good and lean times, to include determining which departments have properly forecast and stuck with their budget plans or have provided a compelling reason why they have not. By being fair and implementing cuts across the board, there is the potential to allow for departments that are a continual drain on the funding system due to poor budgeting practices to continue on this path. The departments that have maintained good budgeting practices and possibly have brought money into the institution may lose some of the ability to keep generating positive attention and funds that supplement the overall revenue of the institution.
2. When targeting focused reductions, especially when they are being forced by a huge ‘cost savings’ implemented at the state level, the first thing to look at are the programs that do generate added revenue for the institution. If this revenue is compromised or lost, then the institution takes a double hit. This group may still be hit hard if it is discovered that it appears the costs they accrue far exceed the revenue they generate.

The next thing to look at, as mentioned in the previous answer, is how each department has handled its annual budget forecasting and implementation. If they have been frugal with what they have to work with and are consistently on target then I would look at those divisions absorbing less of the cutbacks. If the departments have consistently shown a lack of concern for their budgets and are consistently overestimating/underestimating their budgets, they would take the bigger part of the cutback hit.

One of the areas that could help absorb some of the losses is to see if a reduction in personnel at the mid and upper levels is feasible. People that have been with the institution for 20 plus years should be approached about volunteering for early retirements. This does two things: (1) it reduces the costs of salaries and continued healthcare costs from the active employee pool and (2) it allows people at multiple levels who are ready, to assume more responsibility. In reality, this may be more difficult to accomplish at the upper levels since many professors and upper management are essentially hired for life. This is where a significant amount of cost savings can be realized, but getting there can be very difficult to obtain.

A final area is to see if infrastructure cost reduction can be made. See what options are available to reduce electricity and heating costs. This may include reweatherizing all buildings and facilities. Chances are there are grants for doing this. See if there are programs that can be combined and thereby moving classroom functions into fewer buildings. The unused buildings still need to be maintained, but energy costs and maintenance costs can be realized. The institution also needs to make do with what it has. New buildings that may be scheduled for construction may need to be delayed unless it is for bona fide safety concerns.