| Conservative Accounting in The General Products Division |
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| Financial Accounting |
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| General Management |
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Beginner |
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1 |
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Available.
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$9.00
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The year 2000 was a good one for the General Products Division (GPD) of
Altman Industries, Inc., a large industrial products manufacturer.
Sales and profits in the division were significantly above plan due
largely to unexpectedly brisk sales of a new product introduced at the
end of 1999. The good fortune induced Robert Standish, the GPD general
manager, to think about how he could save some of the profits for
periods in which he might need them more. He believed that GPD's plan
for 2001 would be tough to achieve because the corporation as a whole
was not doing well, and corporate managers would expect GPD to show
growth even above this year's abnormally high sales and profit levels.
And already in September, he was sure that his division's profit would
exceed the level above which no additional bonuses were awarded for
higher performance-120% of plan-and he wanted to save some of this
year's profits so that he could report them in a year in which they
would augment his bonus and those of his direct reports.
Robert asked his staff to do what they could before the end of the year
to "stash some acorns" that he could use in future years. He suggested
to Joanne, his controller, that she start preparing the pessimistic
scenarios that could be used to justify the creation of additional
reserves and start thinking about how expenses could be accelerated and
revenues deferred at year-end.
Joanne was uncomfortable. She reminded Robert that among the company
accounting policies was a statement that assets and reserves should be
fairly reported based on the existing facts and circumstances and not
be used to manage income. Furthermore, because of continuing order
declines, the company was looking for ways to report higher, not lower,
profits in the current year and that if the situation did not turn
around quickly, layoffs were threatened.
But Robert explained that GPD would still be reporting very high
profits; he just wanted to save a portion of the excess above plan. And
in any case, GPD couldn't help the corporation much because it was so
small in comparison with the entire corporation.
Assignment
1. Do you approve of Robert's actions? Are they smart
or stupid from the perspective of the division? From the perspective of
the corporation?
2. Are Robert's actions ethical?
3. Should Joanne tell anyone of Robert's request?
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