What responsibilities does the accountant have in this situation?

The Children’s Shoe Company has 100 franchised locations and 6 regional
offices. Each region is managed by a director who reports to the VP of
Operations. In addition to the vice president of operations, executive
management includes the chief financial officer (CFO), the vice president of
marketing, and the vice president of human resources. All executive personnel
work at the corporate headquarters in NY. Each director maintains a regional
office, complete with an administrative staff.

Shortly after taking over the company, the new management revised the
budgeting process. The new budget process is a top-down process. Because the
new budget process affects a director’s compensation, directors have a vested
interest in budget development. To start the budget cycle, regional directors
are given executive goals for the subsequent year’s budget. Those goals include
projected growth in new stores locations and improved revenues, limited salary
increases, and allocated corporate expenses. Directors prepare three budgets —
one for franchised locations, one for corporate locations, and one for
administrative costs associated with the regional offices. The regional budgets
are consolidated into the corporate budget.

The
director of region four follows a routine method for budget preparation. He
delivered the corporate budget goals to his regional accountant to prepare the
first draft of the budget. After the director of region four reviewed the first
draft, he was not pleased. In the director’s opinion, budgeted net income was
too high for the region to achieve. The regional director asked the accountant
to make adjustments.

Corporate
goals included a general price level increase of 2–4 percent. The range was
designed for flexibility to allow higher cost-of-living areas such as Boston
and New York to budget higher levels of cost increases than lower
cost-of-living areas. But even though region four is located in the lowest
cost-of-living area for the company, the director told the accountant to budget
the maximum increase of 4 percent. The director was confident that because the
increase was within the stated goals, the corporate office would not notice.

Even though the director knew that it was not a reasonable goal, he
also told the accountant that region four would open eight (8) new stores
during the coming year. Therefore, the budget should reflect accelerated
start-up costs to consider the expansion. Based on historical precedent, the
region could realistically expect to only open four (4) or five (5) new
locations.

The director of region four has a reputation for retaliating against
employees who choose to ignore his demands. Therefore, the accountant made the
changes without hesitation. The result was a significant reduction in region
(4) four’s budgeted net income.

The accountant is a Certified Management Accountant (CMA) and is
responsible for all of his family income. Therefore, losing the job in region
four would be devastating.

Checklist:

(a) Why do you
think that the director of region four (4) would care about the level of
budgeted net income?

(b) What do you
think the new owner’s reaction would be if they learned of the director’s
actions?

Unit 3: Discussion 2

Ethics at the Children’s Shoe
Company

·
Using the same narrative here as used in Discussion 1 , what are the possible
consequences to the accountant for not presenting accurate budget figures?

·
Refer to the Institute of Management Accountants’ (IMA’s) Statement of Ethical
Professional Practice in Exhibit 1-8 of the textbook. What responsibilities
does the accountant have in this situation? Is there is a violation of the
Statement? If so, how?

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