CVP analysis by intern with an ethical dilemma

Abbott Work Wear, Inc., supplies uniforms for a variety of businesses. Greg Michaels is a new intern in the Accounting department at Abbott. To expand sales, the company is considering paying commission to its sales force. The controller, John Hammond, asks Greg to complete an analysis assuming sales would increase 25% under the proposed sales commission plan. This analysis should include 1) the new breakeven sales figure and 2) the operating profit under the new sales commission plan.

Greg does his best to perform the analysis. He is not exactly sure what he is doing but he does want to appear like he does not understand accounting. After he gets his preliminary analysis finished, he calls his friend, Beth Sparros, who is an accounting analyst at Scrubs and More, a competing uniform supplier. He knows Beth from a church group and figures he can trust her. He tells her he is working on a new project and ask her if they can meet for dinner later, where he can ask her advice.

At dinner, Greg confesses to Beth that he really does not know if he did his analysis correctly. Beth assures him that she has worked on similar things at her company. She asks him if they can go over the analysis together. He readily agrees because this is just the type of help he had hoped to get. He shows her the spreadsheet he has been working on; the two of them discuss each item on the analysis. Greg explains his reasoning behind each calculation and his data assumptions. Beth tells him that his analysis is thorough and agrees that he has done it all correctly as far as she can tell.

Now confident in his work, Greg turns in the proposed sales commission plan analysis the following day. His report ends with a recommendation that the new sales commission plan be undertaken, since it will lead to a significant increase in operating income with only a small increase in breakeven sales. John Hammond glance through the report and is impressed with the appearance of the report; it looks professional and complete. Since John has a lot of other work tasks, he approves the new sales commission plan without any further analysis or investigation.

When he is booking some payroll entries the following week. Greg realizes that he made an error in the CVP analysis he did for the sales commission project. He failed to include the monthly salaries of the sales staff in his computations. Greg is in a panic. If he tells John Hammond of his mistake, Greg is afraid he will not be offered a full-time position upon completion of his internship. Greg decides to keep quiet and not let the controller know of his error. He reasons that it is unlikely that the difference between what he projected versus the actual expenses will be discovered since Abbott does not create detailed monthly operating statements.

Requirements

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

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

What are Greg Michaels responsibilities as a management accountant?

What are John Hammonds responsibilities as a management accountant?

What are Beth Sparrows responsibilities as a management accountant?

2. What would be the impact on breakeven sales from failing to include the fixed monthly salaries? Would the breakeven using the erroneous data be lower or higher than the correct breakeven (the breakeven calculation including the monthly salaries)? Do you think this error would be likely to influence the decision of whether to proceed with the new sales commission proposal?

Discuss the specific steps Greg should take to resolve the situation. Refer to the IMA Statement of Ethical Professional Practice in your response.