Revenue and cost recording and classifications, ethics. Canadian Outfitters (C.O.)

designs and markets jeans to many retailers and distributors around the globe. Its corporate headquarters are in Montreal, Quebec. Manufacturing is done by a subcontractor (Jeans West) on the island state of Caribe. The Caribe government grants locally owned companies a 20% income tax rebate if the ratio of their domestic labour costs to total costs exceeds 25%. Domestic labour costs are defined as the employment costs of all employees who are citizens of Caribe. Nicola Roberts, the newly appointed controller of C.O., has recently been examining payments made to Jeans West. She observes that Jeans West purchases denim from C.O. ($3.60 million in 2007). C.O. paid Jeans West $14.40 million for the jeans manufactured in Caribe in 2007. Based on her industry experience, the $ 14.40-million amount is very low. $he was told it was “a great deal” for C.O. There is also a sizable pay¬

ment by C.O. to the Swiss subsidiary ofJeans West ($5.76 million in 2007). Roberts is told by the Jeans West president that this payment is for fabric design work thatJeans West does with C.O. C.O. has included the $5.76-million payment in its own product design cost. The director of product design at C.O. told Roberts it is an “off-statement” item that historically he has no responsibility for and no say about. To his knowledge, Jeans West uses only C.O.

designs with either zero or minimal changes.

Jeans West’s domestic labour costs in 2007 were $4.32 million, while its total costs were $12 million. Included in this $4.32 million was $1.56 million for labour fringe bene¬

fits (for health insurance, etc.). A component of this $1.56 million is $720,000 for life insurance for Jeans West’s executives. C.O. helped arrange this life insurance policy.

It negotiated with the insurance company managing its own executive life insurance plans to include the Jeans West executives at rates much more favourable than those available in Caribe.

Required 1. What concerns should Roberts have about the revenue and cost numbers in C.O.’s financial reports?

2. Which (if any) of the concerns in requirement 1 raise ethical issues for Roberts? Explain.

3. What steps should Roberts take to address the ethical issues you identified in requirement 2?