Evans Company must expand its manufacturing capabilities to meet the growing demand for its products and is considering two alternatives. The first alternative involves expanding its current manufacturing plant, which is located next to a vacant lot in the heart of the city. The second alternative is the conversion of a warehouse, already owned by Evans, that is located approximately 20 miles outside the city. Both alternatives involve large capital expenditures and will require approval by the company's board of directors. The board has final approval on capital expenditures exceeding $ 1,000,000, and has established a firm policy of rejecting any proposal that has a negative net present value.
Evans' controller, G. Watson, is responsible for the preparation of formal proposals for both alternatives; these proposals must include projected cash flows and net present value computations. Watson has assigned H. Dodge, assistant controller, to assist in the preparation of these proposals. Dodge has completed both proposals for Watson's review. The proposal for the expansion of the current manufacturing facility has a slightly positive net present value. However, the first draft of the proposal for the warehouse conversion has a large negative present value.
When Watson reviewed Dodge's first draft of the warehouse conversion proposal and saw the large negative net present value, he was displeased. He returned the proposal to Dodge with the comment, "You must have made an error. This proposal should look better."
Dodge suspected that Watson was anxious to have the warehouse proposal selected because the choice of this location would eliminate his long commute into the city. Feeling some pressure, Dodge rechecked the computations but found no errors. Dodge then reviewed the projections and estimates that had been used. Although the projections used seemed reasonable, Dodge discarded some of them and replaced them with more favorable estimates that seemed to Dodge to have a remote chance of occurring. Nevertheless, Dodge was comfortable with these revisions.
The revised proposal for the warehouse conversion still had a negative net present value. Watson's anger was evident as he told Dodge to prepare a second revision of the proposal. This time Watson told Dodge to start with a $250,000 positive cash flow and work backward to compute supporting estimates and projections. Dodge is distressed at being compelled to use this approach.
Required:
(1) Refer to the specific standards of competence, confidentiality, integrity, and objectivity in Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management in Chapter 1. Explain the following:
(a) Was H. Dodge's first revision of the proposal for the warehouse conversion unethical?
(b) In what way was G. Watson's conduct unethical when he gave H. Dodge specific instructions to prepare the second revision of the proposal?
(2) Identify the steps H. Dodge should follow in attempting to resolve this situation.