Blake Romney Became Chief Executive Officer Of Peters Inc 2 ✓ Solved

Blake Romney Became Chief Executive Officer Of Peters Inc 2 Years Ago

Blake Romney became chief executive officer of Peters Inc. 2 years ago. At the time, the company was reporting lagging profits, and Blake was brought in to “stir things up.” The company has three divisions: electronics, fiber optics, and plumbing supplies. Blake has no interest in plumbing supplies, and one of the first things he did was to put pressure on his accountants to reallocate some of the company’s fixed costs away from the other two divisions to the plumbing division. This had the effect of causing the plumbing division to report losses during the last 2 years; in the past it had always reported low, but acceptable, net income.

Blake felt that this reallocation would shine a favorable light on him in front of the board of directors because it meant that the electronics and fiber optics divisions would look like they were improving. Given that these are “businesses of the future,” he believed the stock market would react favorably to these increases, while not penalizing the poor results of the plumbing division. Without this shift in the allocation of fixed costs, the profits of the electronics and fiber optics divisions would not have improved. But now the board of directors has suggested that the plumbing division be closed because it is reporting losses. This would mean that nearly 500 employees, many of whom have worked for Peters their whole lives, would lose their jobs.

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Determining whether a division reporting losses should be closed is a multifaceted decision that hinges on various financial, strategic, and ethical considerations. Furthermore, the reallocation of fixed costs across divisions raises ethical questions about transparency and manipulation of financial data. This essay explores these issues in detail, analyzing the implications of loss reporting, the ethics of cost allocation, and the appropriate course of action for Blake Romney and the board of Peters Inc.

Understanding Losses and the Decision to Close a Division

Reporting losses does not automatically necessitate the closure of a division. Losses can stem from temporary market conditions, strategic investments, or accounting practices that distort true profitability. For example, a division might incur short-term losses during a restructuring phase or due to unfavorable market fluctuations. Conversely, persistent and systematic losses may indicate underlying structural issues, poor management, or declining market relevance. Therefore, decision-makers must analyze the root causes of losses before determining whether closure is justified.

In the context of Peters Inc., the recent losses reported by the plumbing division may be artificially inflated due to Blake's reallocation of fixed costs intended to manipulate divisional performance metrics for strategic or personal reasons. If these losses are a result of such accounting manipulations rather than genuine economic decline, shutting down the division could overlook potential for future recovery or restructuring.

Ethical Implications of Cost Reallocation

The reallocation of fixed costs from high-growth divisions like electronics and fiber optics to the plumbing division raises significant ethical concerns. Fixed costs are often allocated based on logical and transparent methodologies; altering these allocations to favor certain divisions can mislead stakeholders. As Parker (2016) highlights, “Unless fixed costs are allocated properly, the resulting information may lead management to make faulty decisions based on erroneous assumptions.”

In this case, Blake's decision to shift costs appears motivated by a desire to enhance the apparent performance of the electronics and fiber optics divisions, potentially at the expense of transparency and integrity. Deliberately misrepresenting financial data undermines ethical standards in accounting and corporate governance, eroding trust among stakeholders and potentially violating legal and regulatory frameworks.

From an ethical standpoint, manipulating cost allocations to conceal poor divisional performance constitutes misconduct. Ethical corporate behavior requires honesty, transparency, and accountability—principles that are compromised when financial reports are intentionally distorted. Furthermore, such actions can lead to misguided strategic decisions, such as prematurely closing a division that might recover or be restructured successfully.

Recommendations for Blake and the Board

Blake Romney faces a pivotal decision: whether to continue manipulative tactics or to adopt transparent and ethically sound practices. The best course of action involves transparency with the board and stakeholders about the true financial condition of the divisions. Blake should disclose the reallocation practices and their motives, allowing the board to make informed decisions based on accurate data.

Additionally, the board should conduct a thorough, unbiased financial audit to assess the genuine performance of the plumbing division. This includes analyzing market conditions, operational efficiency, and potential for turnaround strategies. If the division's losses are primarily due to temporary or recoverable factors, closure may be unwarranted.

Blake should also consider resigning if his actions have compromised ethical standards. Leadership committed to transparency and integrity can restore stakeholder trust and support sustainable growth. Furthermore, implementing standardized, transparent cost accounting practices would prevent future distortions and improve managerial decision-making.

Conclusion

In conclusion, reporting losses does not necessarily mean a division should be shut down; a comprehensive analysis of underlying causes is essential. Ethically, reallocating fixed costs to manipulate divisional performance is problematic and can lead to misguided strategic actions. Blake Romney should prioritize transparency, conduct thorough evaluations, and possibly resign from his position if his actions undermine ethical standards. Ethical financial management sustains long-term stakeholder trust and supports sustainable corporate growth.

References

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