John Brigley, CPA, is the controller of Baden Foods, a large privately owned food processing company located in southern Ontario. Brigley received his designation as a certified professional accountant several years ago and has been working his way up the corporate ladder at Baden Foods. As controller, Brigley is responsible for coordinating the preparation of the annual operating budget, which includes projections of revenues and expenses for the coming year. Once the budget is approved by James Davis, the president of Baden Foods, it is used in the monthly performance report, which compares actual results to the budget projections.

To provide an incentive for the senior management team to make decisions that benefit the company as a whole, last year Davis established a bonus plan. In any month that the company’s actual operating income (revenues minus expenses) is better than the budgeted amount, all members of the senior management team, including the CFO, the controller, the vice-president of Production, and the vice-president of Marketing, receive a bonus. Last year was the first year the new bonus plan was used, and bonuses were paid out in 5 of the 12 months of the fiscal year.

Late Friday afternoon, as Brigley was working on finalizing the operating budget for the upcoming fiscal year, he received a call from Jan Robson, the CFO at Baden Foods. The conversation went as follows:

Robson: Hi John, how goes the budgeting process? We have the review with James Davis next week so I just want to be sure we’re good to go.

Brigley: Really well, Jan. I’m just putting the final touches on the budget projections and will have a draft version for your review first thing Monday morning.

Robson: Great, glad to hear it. How do the operating income numbers look compared to last year’s actual results?

Brigley: They look great. With the success of some of our new products last year, our new marketing campaign, and the tainted food scandal that has plagued one of our key competitors, I’m budgeting significant increases in operating income each month compared to last year.

Robson: Significant increases every month? Are you sure about this?

Brigley: Well, as sure as one can ever be when projecting what revenues and expenses will be in the future. But I’m confident that the budget is based on reasonable expectations. I’ve talked to all the key managers in production and marketing, and they agree that my estimates are very reasonable.

Robson: Sounds like you’ve done your homework, as usual. I’m thinking though that maybe being a bit more conservative in our budget estimates might be a better way to go.

Brigley: I don’t quite follow. It’s not that the estimates are aggressive. As I said, all the key managers think the budget is reasonable, and attainable if we work hard.

Robson: Right, I understand that. I’m just saying that given the new bonus plan that Davis introduced last year, maybe we should be developing monthly budgets that we are sure we can meet or beat. Do you follow?

Brigley: Wait a minute—are you suggesting that we intentionally lowball the budget numbers just so we can get our bonuses each month?

Robson: I prefer to think of it as conservative budgeting as opposed to lowballing. Plus, it’s not like I’m asking you to misstate the actual revenues and expenses that get reported each month. That would be unethical since the actual numbers get used by our creditors and by the tax authorities.

Brigley: I don’t know, Jan. Intentionally developing budgets that we know we can beat just to get our bonuses seems just as unethical as misstating the actual results.

Robson: I disagree. The budgets are used only for internal purposes. What’s the harm in being a little conservative? Besides, we all work hard and we deserve the monthly bonuses. Davis will never know because he’s so busy with his charitable foundations these days that he really doesn’t have a good idea of what’s realistic when it comes to the budget each year. As you know he basically approves whatever we recommend without much discussion.

Brigley: But won’t he get suspicious when actual results are better than the budget every month?

Robson: Heck no, he’ll just be delighted that we’re doing better than expected! It’s a win–win situation, John. We’ll get our bonuses and Davis will be happy the company is doing so well. I’ve got to run, but I look forward to seeing those conservative budget projections first thing Monday morning.

Required:

1. In deciding whether to comply with Robson’s request for a “conservative budget,” what aspects of the code of professional ethics featured in Exhibit should guide Brigley’s behaviour?

2. What would you recommend that Brigley do, and why?