Eco Paper Ltd operates two paper mills in Pollution, a small town located within the United Kingdom (UK). During the last two years the business has lost a number of important customers to overseas competitors and has had to fire 20% of its work force. While increased competition posed a significant threat, the UK government was debating whether to introduce new environmental regulation on the UK paper industry in order to reduce greenhouse gas emissions.

As a response to this planned legislation, the company had prepared are port entitled “The Environmental Impact of the Paper Industry in the West of England” which outlined the financial impact of requiring paper mills to install new pollution control technology and filtering systems. Sam Slick, the Company President, was due to present this report to a House of Commons Select Committee next week in London.

The case opens with Peter Profit, the company’s Finance Director, discussing the company’s environmental impact report with Graham Green, the Head Accountant.

“I thought we understood each other Graham. I can’t believe that you are threatening to go public with your idiotic statements about this report. You’re about to damage all the important things in your life: your career, your friendships and your company!”

After thinking for a moment, Graham offered a reply:

“I’m sorry, Peter. I know how much this means to you, but I don’t think that I have a choice in this matter. I can’t sit by while you allow this report to go forward. We both know that these numbers have no foundation in fact. The Pollution filters will not cost that much to fit and maintain.”

Peter continued his verbal assault on Graham:

“Well, Graham, your stubbornness is causing a problem for us all.I will get Sam Slick, and we will see what Sam thinks about your opinion”.

As Graham waited for Peter to return, he thought about his ten years working at Eco Paper. Graham started working at the firm as a warehouse assistant just after he left high school. As a result of an accident in the warehouse, Graham seriously injured his right leg and had been transferred to a desk job in the accounting office. While an accounting clerk’s salary was low, his talent for financial analysis quickly brought him to the attention of Peter Profit. Within five years, the company had sponsored him to attend university and allowed him to complete his Chartered Institute of Management Accountants (CIMA) professional certification. He was a CIMA gold medal list in his exams and was recently promoted to head accountant. With two children, a wife and a large mortgage, Graham was glad to be promoted. Although this position meant more pay and a new challenge, it also meant that he was no longer involved in day-to-day financial analysis and decision making.

The office door opened, and Peter entered with Sam Slick, the President. Mr Slick had worked for the company for thirty years and had a solid reputation in the UK paper industry. Sam’s voice broke the silence

“What is the problem, Graham? “Peter tells me that you have a few concerns about the report that we’re submitting to the Select Committee.”

Graham thought for a moment and then said:

“Well, I think we, ‘the company’, have some major issues here. The report indicates that we’ll experience financial problems if we are forced into installing additional effluent equipment to monitor pollution. The report states that we will be pushed into bankruptcy if the legislation is passed. But we all know that these cost estimates are inflated and do not include the real Peteret price of the required technology. There’s no way that our operating costs would increase by 30% if the legislation was implemented. It appears that the author of the report either guessed at the environmental costs involved or tried to provide a negative and biased account of the financial impact of the legislation. No one has ever tried to manage green issues or attempted to identify ways of reducing such costs. You have to testify before the Select Committee as to the truthfulness of this report - and there’s not a shred of truth within it. All of the cost estimates are too high. Furthermore, the report even predicts that industry revenue will fall by 5% per year as a result a recession. Our internal managerial forecasts suggest that industry revenues will actually rise by 2% per year as the advertising Peteret is using much more paper.”

Sam Slick was quick to respond:

“Slow down, son, we have to use different figures for different purposes. When we report to our stockholders, we give them numbers that are substantially altered from our internal documents, right? In this case, we have to make those dunderheads in the government see what all this regulation is going to do to us. Besides, they know we’re going to use the numbers that suggest the legislation is unworkable for the industry.”

Graham could not believe what he was hearing:

“But this isn’t simply a matter of different figures. These numbers have been totally fabricated. And they don’t take into account the damage that we’re doing to the river and wildlife. I talked to our production engineer a week ago, and he assures me that the stuff we are currently dumping into the river was cleaned up by our competition years ago. The community downstream of our plants is effectively drinking this effluent. We are going to be subject to a huge lawsuit if they ever trace it to us. Furthermore, some customers are now requiring that their paper suppliers possess an accredited environmental management system before they will even accept an order or tender from us. I think ‘our attitude’ to this issue is all wrong and strategically short sighted. We have to think about our external environment, customers, competitors and other stakeholders.

Sam Slick snorted with disdain at such suggestions:

“Rubbish, our aim has always been to produce our products at the lowest possible cost. This strategy has worked successfully for many years, and no ‘hippie’ environmentalist is going to change things. Environmental protection costs Profit. According to our report, the new legislation will force up our product costs, and make our prices too high. That is the truth, and there is nothing more to say about it. Accounting figures never lie.”

Graham couldn’t help but reply:

“But our competitors have invested in new technology and use higher quality raw materials that greatly reduce effluent levels. Price is not the only factor we need to consider when designing and manufacturing our products. Quality levels are increasing across the Peteret, but we don’t even try to measure product quality or how happy our customers are with our product. Certain customers will pay more for ‘green’ products. Other customers expect a ‘greener’ product at no extra cost. Our strategy is out of date and our financial analysis and management accounting systems should be telling us this. Being ‘greener’ could actually save us Profit and attract customers, but our report seems to overlook this. We should change our figures, or we could ultimately face a lawsuit. If we do face legal action, you could go to jail, and I could get my professional accounting certification revoked. Asa member of a professional accounting body, I must adhere to its Code of Ethics you know.”

The mention of legal action made SamSlick very annoyed:

“We’ll cross that bridge when we come to it. You’ve got to remember what is at stake here. The town of Pollution depends on our mills. It’s your buddies you’d be threatening to put out of work, Graham. This legislation may not bankrupt us, but it will certainly put a squeeze on profits. If profits are gone, there will be no more bonuses. Lower profits will also convince head office that there is zero value in investing in new production machinery for the mills.”

Sam Slick slowly lit a cigar, and continued:

“The bottom line is this, Graham. You’re an important part of out team – we’ve invested a lot in you. Peter was talking about working you into a new role with an increased salary. We’d hate to let you go because of this small issue. However, we need to have everyone working on the same goal, especially with the competitive pressures we are facing. Besides, Peter tells me that this isn’t even your responsibility. If you hadn’t picked up the copy of the report on my desk, you wouldn’t be involved. Now take the rest of the day off and go and spend some time with your family on your boat. Think the problem through, and I’m sure you will see the long-term benefit of our strategy. This pollution problem is just a passing phase in society. Besides, we’ve had the problem for as far back as I can remember. A few extra years won’t hurt.”

Required

Assuming that you are Graham Green, work within a group work to discuss answers to the following questions:

1. Using either the Statement of Ethical Professional Practice issued by the Institute of Management Accountants’ (IMA) or The Code of Ethics for Professional Accountants published by CIMA as your guide, determine whether there is an ethical issue for you in this scenario. Where relevant, make direct reference to each Code’s provisions to help support your assertions.

2. What would you do if you were Graham Green in this scenario?