Case Study:

The Fore Corporation is an integrated food processing company that has operations in over two dozen countries. Fores corporate headquarters are in Chicago, and the companys executives frequently travel to visit Fores foreign and domestic facilities.

Fore has a fleet of aircraft that consists of two business jets with international range and six smaller turboprop aircraft that are used on shorter flights. Company policy is to assign aircraft to trips on the basis of minimizing cost; however, the practice has been to assign the aircraft based on the organizational rank of the traveler. Fore offers its aircraft for a short-term lease or for charter by other organizations whenever Fore itself does not plan to use the aircraft. Fore surveys the market often in order to keep its lease and charter rates competitive.

William Earle, Fores vice president of finance, has claimed that a third business jet can be justified financially. However, some people in the controllers office have surmised

that the real reason for a third business jet was to upgrade the aircraft used by Earle. Presently, the people outranking Earle keep the two business jets busy with the result that Earle usually flies in smaller turboprop aircraft.

The third business jet would cost $11 million. Capital expenditure of this magnitude requires a formal proposal with projected cash flows and net present value computations using Fores minimum required rate of return. If Fores president and the finance committee of the board of directors approve the proposal, it will be submitted to the full board of directors. The board has final approval on capital expenditures exceeding $5 million and has established a firm policy of rejecting any discretionary proposal that has a negative net present value.

Earle asked Rachel Arnett, assistant corporate controller, to prepare a proposal on a third business jet. Arnett gathered the following data:

• The acquisition cost of the aircraft, including instrumentation and interior furnishing.

• Operating cost of the aircraft for company use.

• Projected avoidable commercial airfare and other avoidable costs from company

  use of the plane.

• Projected value of executive time saved by using the third business jet.

• Projected contribution margin from incremental lease and charter activity.

• The estimated resale value of the aircraft.

When Earle reviewed Arnetts completed proposal and saw the large negative net present value figure, he returned the proposal to Arnett. With a glare, Earle commented, You must have made an error. The proposal should look better than that.

Feeling some pressure, Arnett went back and checked her computations; she found no errors. However, Earles message was clear. Arnett discarded her projections that she believed were reasonable and replaced them with figures that had a remote chance of actually occurring but were more favorable to the proposal. For example, she used first- class airfares to refigure the avoidable commercial airfare costs, even though company policy was to fly coach. She found revising the proposal to be distressing.

The revised proposal still had a negative net present value. Earles anger was evident as he told Arnett to revise the proposal again and to start with a $100,000 positive net present value and work backward to compute supporting projections.

Instructions:

Based on the scenario above, answer the following questions completely:

1. Explain whether Rachel Arnetts revision of the proposal was in violation of the

IMAs Statement of Ethical Professional Practice.

2. Was William Earle in violation of the IMAs Statement of Ethical Professional

   Practice by telling Arnett specifically how to revise the proposal? Explain your

   answer.

3. Identify specific internal controls that Fore Corporation could implement to

   prevent unethical behavior on the part of the vice president of finance.