Standards of Ethical Conduct for Practitioners of
Management Accounting and Financial Management
Group Activity in Strategic Cost Management
PREPARED BY:
Bebita, Marcos A.
Lumagbas, Nicole M.
Ravas, Ralph Jay M.
Solahis, John Richard S.
February 6, 2025
Exercise 9 (Ethics and the Manager)
Fact Pattern:
Happyville Inc., a chain department store decided to remodel its chain stores to catch
‘upscale clients’.
Before large scale implementation of the new venture, the company decided to remodel
two chain stores as dry run if the new venture is feasible and profitable.
Liza Perez, assistant controller alongside management personnel were offered bonuses
based on the sales growth and profitability of the remodeled stores.
Liza discovered a ‘sizable inventory of outdated goods’ that should have been discounted
for sale or returned to the manufacturer. However, with the joint consensus of other
management personnel, they decided to ignore reporting the inventory as obsolete as it
would diminish financial result and their bonuses.
1. According to the Standards of Ethical Conduct for Practitioners of Management Accounting
and Financial Management, would it be ethical for Perez not to report the inventory as obsolete?
- No, not reporting the sizable inventory of outdated goods as obsolete is evidently
unethical as it would compromise various standards of ethical conduct based on the provisions of
standards of ethical conduct for practitioners of management accounting and financial
management promulgated by Institute of Management Accountant (IMA) namely as follows:
Competence – By intentionally ignoring the obsolete inventory in the financial
report, Perez violated competence through incomplete and unclear report after
her appropriate analysis of relevant information with regards to the remodeled
stores. This is a clear-cut incompetence on Perez for she may be able to
pinpoint a problem to the test run but instead of reporting it to the top
managers which could be a ground for future appropriate actions, she decided
to ignore to boost the stores’ performance and increase her bonus.
Integrity- On the ground of integrity, it is unethical for Perez not to report the
inventory as obsolete. Integrity requires practitioners to avoid conflict of
interest which in the case of Perez revolves around the dilemma on whether or
not to report the obsolete inventories since their bonuses is tied on sales
growth and profitability. Perez and his colleagues must not withhold
information and instead communicate and report both favorable and
unfavorable regardless the consequence. Filtering information eliminates
transparency and accuracy resulting to poor decision making that could be
detrimental for the company in the long run. Refraining to report the
inventories as obsolete could discredit their profession and misrepresents the
financial health of the company. Following the consensus made could
compromise their ability to carry out their duties since the act relates to
committing internal fraud which can create culture of deception and dishonesty
among them. Thereby decreasing top managements’ trust and confidence to
controllers in handling company’s vital operational information as they may be
subjected to inappropriate judgement due to personal interest.
Objectivity - Objectivity, a fundamental principle in accounting and finance,
mandates that decisions and judgments be grounded in facts, evidence, and
logical reasoning, free from personal bias or influence. A scenario involving
sales-growth-tied bonuses compromises this principle. The management
team, motivated by these bonuses, chose to ignore outdated inventory, a
decision driven by the desire to inflate financial results and secure bonuses.
This directly violates objectivity, creating a personal bias as their financial
interests are linked to reported performance. This distorted view of financial
health misleads stakeholders (shareholders, creditors, investors) who rely on
accurate information, potentially causing significant harm.
2. Would it be easy for Perez to take ethical action in this situation?
- Reporting the outdated goods as obsolete in the annual financial report is certainly the
most ethical course of action to do but it entails repercussions towards Perez and Happyville
Inc.’s new venture. Hence in order to objectively determine whether it would be easy for Perez to
resort to ethical action we must weigh down the consequences of doing what is right.
Reporting the outdated goods as obsolete bears the following repercussion:
1. It will decrease sales because the outdated goods can only be sold
through huge discount or returning to manufacturer and demand rework
which will takes which will undermine profitability of the remodeled stores,
it will also give rise to operational inefficiency through poor inspection of
goods coming to the department stores from manufacturers or poor
inventory management by the personnel assigned.
2. On the preposition that Happyville Inc. is the in-house manufacturer of the
goods flowing into their department stores, this could entail poor
production system attributed to outdated machineries. The firm may be too
focused towards expanding their branch or increasing their physical stores
while hampering innovation. Thus, their products tend to be outdated. If
contemplated integratively, it could mean that the new venture may not be
feasible because product quality is being compromised for the expansion
of department stores.
To report the obsolescence with all honesty means facing the aforementioned outcome,
this may not be easy for Perez because it compromises her personal interest (increased bonus)
as well as the firm’s interest (Net Positive Value with regards to remodeled stores) but as a
controller she is bound to act ethically. Reporting such unfavorable information may
compromised short term objective but it only pins improvement needed to the new venture, to
revise initial plans but in the end such improvements and revision is all essential in attaining
company’s goal. That is only a drawback, it is better to sacrifice short term profitability over long
term sustainability because of satisfied stakeholder, especially costumers.
