Exercise 14: Ethics And The Manager At Richmond Inc
Exercise 14 Ethics And The Managerrichmond Inc Operates A Chain Of
Exercise 14: Ethics and the Manager Richmond Inc. operates a chain of 44 department stores. Two years ago, the board of directors approved a large-scale remodeling of its stores to attract a more upscale clientele. Before finalizing these plans, two stores were remodeled as a test. Linda Perlman, assistant controller, was asked to oversee the financial reporting for these test stores, and she and other management personnel were offered bonuses based on sales growth and profitability of these stores. While completing the financial reports, Perlman discovered a sizable inventory of outdated goods that should have been discounted for sale or returned to the manufacturer.
She discussed the situation with her management colleagues; the consensus was to ignore reporting this inventory as obsolete because reporting it would diminish the financial results and their bonuses.
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In this scenario, Linda Perlman faces a significant ethical dilemma rooted in professional integrity and corporate responsibility. According to the Institute of Management Accountants (IMA) Statement of Ethical Professional Practice, management accountants are required to uphold principles such as honesty, integrity, objectivity, and credibility. Specifically, the ethic of integrity mandates that professionals refrain from engaging in conduct that would mislead or deceive other stakeholders (IMA, 2020). Perlman's decision whether to report the outdated inventory as obsolete directly impacts her adherence to these principles.
Given that the inventory is clearly outdated and should have been discounted or returned, failing to report it as obsolete compromises the accuracy of financial statements and violates ethical standards. Not reporting it would result in financial reports that overstate assets and potentially profit, thus misleading investors, creditors, and other users of the financial statements. Such an act constitutes a breach of the ethical obligation to provide truthful and transparent financial information, as emphasized by the IMA Code (IMA, 2020).
From an ethical perspective, Perlman should report the inventory as obsolete, ensuring compliance with accounting principles and ethical standards. This action aligns with her duty to maintain integrity and honesty in her professional responsibilities, fostering trust in financial reporting. Conversely, choosing to ignore the obsolete inventory for personal gain undermines these ethical obligations and could be considered fraudulent or misleading, exposing Perlman and the organization to legal and reputational risks.
However, acting ethically in this situation may not be straightforward or easy. Peer pressure to conform with management’s consensus, fear of jeopardizing bonuses, or concern about job security may obstruct her from reporting honestly. The incentive structure, which rewards sales growth and profitability without regard to accurate reporting, further complicates ethical decision-making by creating a conflict between personal incentives and professional standards.
Research indicates that individuals often face significant barriers when attempting to adhere to ethical principles in organizational contexts, especially when personal or organizational incentives are misaligned with ethical standards (Schwepker, 2001). Overcoming such barriers requires strong personal integrity, organizational culture that promotes ethical behavior, and clear ethical policies supported by leadership (Kaptein, 2008). Therefore, while Perlman’s ethical obligation is to report the inventory as obsolete, the ease of acting ethically depends on the organizational environment and her personal commitment to ethical principles.
To promote ethical conduct, organizations should establish a culture that encourages transparency and accountability. Ethical training, whistleblower protections, and leadership exemplifying integrity are vital components that support ethical decision-making. In Perlman’s case, external and internal organizational supports could facilitate her in making the ethically correct decision, despite the pressures to conform to potentially unethical management practices.
In conclusion, Perlman should adhere to the ethical standards set by the IMA by reporting the obsolete inventory accurately. Although it may be challenging due to organizational pressures and incentives, sustained commitment to professional integrity and a supportive ethical culture are essential to uphold trust in financial reporting and avoid misconduct.