1.Catco Ltd.

From observations, inspection of various documents, and analytical procedures performed during your management audit of the purchasing department of Catco Ltd., you have determined that the department is structured as a cost center, and that managers of the department are evaluated and annual cash bonuses determined based on purchase cost minimization. In recent years, bonuses and perquisites have been consistently high for purchasing department managers. At the same time, bonuses for managers in other functional areas such as production and marketing have been falling.

Analytical review procedures have determined that spoilage, rework, inventory write-offs, returned sales, and warranty claims have all been rising in recent years. Furthermore, you are aware from trade magazines and interviews with directors and senior managers that the company's reputation as a manufacturer of high quality products seems to be eroding, and market share is being lost to Japanese and other Pacific Rim competitors, whose products consumers seem to view as more reliable.

From interviews conducted with the treasurer, chief executive officer, and chairman of the board, it seems clear that the market price of the firm's shares seems to vary, largely due to the investment community's expectation of future cash flows. Sadly, the market value of the firm's shares has been sliding steadily downwards for the last three years, against general market trends.

Required

a.Explain goal congruence and the potential for ethical dilemmas to arise for purchasing management.

If purchasing department managers pursue cost minimization, with a view to maximizing their annual bonus, should they be chastised if the market price of the company's shares drops?