A9-76 Ethics and budgetary slack (Learning Objectives 1, 2, 3, & 4)

Gutierrez Company, a publicly held corporation, operates a regional chain of large drugstores. Each drugstore is operated by a general manager and a controller. The general manager is responsible for the day-to-day operations of the store, while the controller is responsible for the budget and other financial tasks. The general manager, Tracie Kappan, has been at Gutierrez Company for several years. Employee turnover is high at Gutierrez Company, just as it is in the retail industry in general. Kappan just hired a new controller, Min Yang.

Yang was asked to prepare the master budget. Each retail location prepares its master budget once a year and then submits that budget to company headquarters for approval. Once approved by headquarters, the master budget is used to evaluate the stores performance. These performance evaluations directly affect the managers bonuses and whether additional company funds are invested in that location.

When Yang was almost done preparing the budget, Kappan instructed him to increase the amounts budgeted for labor and supplies by 20%. When asked why, Kappan responded that this budgetary cushion gives store management flexibility in running the store. For example, because company headquarters tightly controls operating funds and capital improvement funds, any extra money budgeted for labor and supplies can be used to replace store furnishings or to pay bonuses to help to retain good employees. She explains that the chance of getting extra funds from company headquarters is not good; this cushion is usually the only opportunity to replace store dcor or to pay bonuses to key employees. Kappan also needs extra funds occasionally to make under the table payments to employees as incentives to work extra hours or to keep them from leaving for a higher-paying job.

Yang feels conflicted. He is eager to please Kappan, and he is wondering what he should do in this situation.

Requirements

1. Using the IMA Statement of Ethical Professional Practice as an ethical framework, answer the following questions:

   1. What are the ethical issue(s) in this situation?

   2. What are Yangs responsibilities as a management accountant?

2. Would your answer differ if Gutierrez Company were instead owned by one individual instead of being publicly held? Why or why not?

3. Would anyone be harmed if slack were to be built into the budget? Why or why not?

4. Discuss the specific steps Yang should take in this situation. Refer to the IMA Statement of Ethical Professional Practice in your response.

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