MAA262 – Management Accounting Assessment Task 2

Question 3

Keri Swasey is a manager of the Furniture Division at New Stone Manufacturing (NSM) that produces tables and chairs for living rooms, and her controller, Stoney Lawson, a CMA and CPA. Keri just received the financial statement for the Furniture Division for the current fiscal year. He figured out the reported income is just slightly above the break-even point. The Furniture Division has low operating income and plans to apply for a loan. He is worried about the division’s poor financial performance will reduce the chance to get the loan. Below is the conversation between Keri and Stoney.
KERI: We need some creative accounting to boost our performance. I have an idea that might help us, and I wanted to see if you would go along with it. We have some partially finished chairs in process, and why not increase the percentage of completion for these ending work-in-process? It can increase the equivalent units and decrease the cost of goods sold for the current year. The presence of the work-in-process gives us a chance to improve our financial position.
STONEY: Keri, I don’t know. What you’re suggesting is risky. It wouldn’t take much auditing skill to catch this one.
KERI: You don’t have to worry about that. The auditors won’t be here for at least six to eight more weeks. By that time, we can have those partially completed units completed and sold. I can bury the labour cost by having some of our more loyal workers work overtime for some bonuses. The overtime will never be  reported. And, as you know, bonuses come out of the corporate budget and are assigned to overhead—next year’s overhead. Stoney, this will work. If we look good and get the loan to boot, corporate headquarters will treat us well. If we don’t do this, we could lose our jobs.

Required:

Please state two of the ethical standards, as provided by the Institute of Management Accountants (IMA) Statement of Ethical Professional Practice1 , which are being jeopardized by Keri’s suggestion and justify why these two standards are being jeopardized. (For an answer with more than two ethical standards the first two
standards will be marked, and the remainder will be ignored). (Chapter 1, 10 marks)