Cool Air, Inc.

Jack Lear, an internal auditor for Cool Air, Inc., met with Paul Marsh, the manager of the cost accounting department, to discuss a concern about a possible “glitch” in the standard cost system. Jack explained that he had been reviewing the employee time cards in the company division where air-conditioning units and refrigerators were assembled. The time cards reflected how much employee time was devoted to the assembly of air-conditioning units and how much time applied to refrigerators. Jack’s concern was that the hours actually charged for each of these operations always seemed to be right on target with the standard labor times for each air-conditioning unit and each refrigerator unit assembled; yet Jack had been told a number of times by employees in the assembly department that the standard hours for assembling air-conditioning units were too low. The employees felt that they could not meet these standards without “fudging” their time cards or sacrificing some quality work in the assembly process. Since company policy emphasized product quality, Jack suspected that time sheets were being modified by shifting hours worked on air-conditioning units to the time sheets for assembling refrigerators.

Paul Marsh, the cost manager, thought for a minute about what Jack was telling him and then made an interesting observation. He said that he had been concerned about the fact that the company’s prices for its air-conditioning units were generally lower than its competitors’ prices for the same size and quality of units, whereas its prices for refrigerators were generally higher than those of its competitors. He wondered if the company’s pricing structure, which was tied to its standard costs, was out of line with competition. This position was reinforced when Paul and Jack looked at the company’s sales of each of these products. Over the past year or so, the company had gained market share in air-conditioner sales and had lost market share in refrigerators! Based on this information, Paul asked Jack to do some “detective” work on the time cards in the assembly division and report back his findings.
A few days later, Jack reported that he had found convincing evidence that the foremen in the assembly division had been in collusion to “doctor” employee time sheets in order to more closely meet the time standards for both air-conditioner and refrigerator assembly.
1. Who are the stakeholders affected by the “doctoring” of time sheets?
2. What are the ethical issues in this situation?
3. What should Paul do?