Question:
Phoenix Press produces consumer magazines. The house and home division, which sells home-improvement and home-decorating magazines, has seen a 15% reduction in operating income over the past 15 months, primarily due to an economic recession and a depressed consumer housing market. The division’s Controller, Sophie Gellar, has been pressurized by the CFO to improve her division’s operating results by the end of the year. Gellar is considering the following options for improving the division’s performance by the end of the year:
a. Cancelling three of the division’s least profitable magazines, resulting in the layoff of 30 employees.
b. Selling the new printing equipment that was purchased in February and replacing it with discarded equipment from one of the company’s other divisions. The previously discarded equipment no longer meets current safety standards.
c. Recognizing unearned subscription revenue (cash received in advance for magazines that will be delivered in the future) as revenue when cash is received in the current month (just before the fiscal year-end), instead of depicting it as a liability.
d. Reducing liability and expenses related to employee pensions. This would increase the division’s operating income by 5%.
e. Recognizing advertising revenues that relate to February in December.
f. Delaying maintenance on production equipment until January, although it was originally scheduled for October.
Required
1. What are the motivations for Gellar to improve the division’s year-end operating earnings?
2. From the point of view of the “Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management,” Exhibit 1-7 (page 35), which of the preceding items (a–f) are acceptable? Which of the aforementioned items are unacceptable?
3. How should Gellar handle the pressure to improve performance?
Transcribed Image Text:
STATEMENT OF ETHICAL PROFESSIONAL PRACTICE
Members of IMA shall behave ethically. A commitment to ethical professional practice includes
overarching principles that express our values and standards that guide member conduct.
PRINCIPLES
IMA's overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility.
Members shall act in accordance with these principles and shall encourage others within their
organizations to adhere to them.
STANDARDS
IMA members have a responsibility to comply with and uphold the standards of Competence,
Confidentiality, Integrity, and Credibility. Failure to comply may result in disciplinary action.
L. COMPETENCE
1. Maintain an appropriate level of professional leadership and expertise by enhancing knowledge
and skills.
2. Perform professional duties in accordance with relevant laws, regulations, and technical standards.
3. Provide decision support information and recommendations that are accurate, clear, concise, and
timely. Recognize and help manage risk.
II. CONFIDENTIALITY
1. Keep information confidential except when disclosure is authorized or legally required.
2. Inform all relevant parties regarding appropriate use of confidential information. Monitor to
ensure compliance.
3. Refrain from using confidential information for unethical or illegal advantage.
III. INTEGRITY
1. Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid
apparent conflicts of interest. Advise all parties of any potential conflicts of interest.
2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
3. Abstain from engaging in or supporting any activity that might discredit the profession.
4. Contribute to a positive ethical culture and place integrity of the profession above personal interests.
IV. CREDIBILITY
1. Communicate information fairly and objectively.
2. Provide all relevant information that could reasonably be expected to influence an intended user's
understanding of the reports, analyses, or recommendations.
3. Report any delays or deficiencies in information, timeliness, processing, or internal controls in
conformance with organization policy and/or applicable law.
4. Communicate professional limitations or other constraints that would preclude responsible judgment
or successful performance of an activity.
Source: IMA Statement of Ethical Professional Practice, 2017. Montvale, NJ: Institute of Management Accountants.
Reprinted with permission from the Institute of Management Accountants, Montvale, NJ, www.imanet.org.
EXHIBIT 1-7
Standards of
Ethical Behavior
for Practitioners
of Management
Accounting and
Financial Management