Roger Smith, the controller of Play World, Inc., a toy company, has just completed an analysis of a make-or-buy decision with respect to a particular part for one of the new toys the company is planning to manufacture. The result clearly shows that the company should buy the part from one of the three available suppliers (based on recent price quotations from those suppliers). Based on this analysis, Smith and the division manager, Kate Pfirman, agreed to proceed with placing an order.
They issued instructions to the purchasing department indicating that the order should be placed for a price not higher than $3.40 per part. A few days later, Smith received a phone call from the purchasing department indicating that all three suppliers had raised their price to $4.00 per unit. It was a normal business practice to raise prices after quotations had been issued.
It was immediately clear to Smith that it would be disadvantageous to his company to buy the part at the higher price. He discussed the new information with Pfirman, and they agreed to proceed with manufacturing plans to make the part internally. Smith thought it was rather strange that all three suppliers had raised their price to the same amount, but felt there was nothing he could do about it.
A few days later, Smith’s secretary, Lynn Berry, asked if she could have a private conversation with him. Berry told him she was good friends with the secretary for the president of one of the suppliers from which Play World had planned to buy the part for the new toy. Berry’s friend had casually mentioned that her boss had been on the phone with the other suppliers and they had agreed to raise the price for certain parts they were manufacturing to specified dollar amounts.
Berry said she was reluctant to tell Smith because she didn’t want her friend to get in trouble for revealing confidential information outside her company. For Smith, this information was the missing piece that explained why the price for the part had been raised to $4.00 by all three companies.
Smith thanked Berry for the information and told her not to worry; he would keep the information to himself but would give some thought to what he would eventually do with what she had told him.
1. Who are the parties that are affected by this bid-rigging scheme?
2. What should Smith do with the information he received from Berry (keep in mind his responsibilities to the accounting profession, to his company, and to Berry)?