Harry Stylish is the manager of the athletic shoe division of Gutfield Products. Gutfield is an Europeanbased company that has just purchased Fastfoot, a leading European shoe company. Fastfoot has longterm production contracts with suppliers in two East European countries: Ofena and Navelli. Stylish receives a request from Jim Nasium, president of Gutfield Products. Stylish and his controller, Paul Clemenza, are to make a presentation to the next board of directors' meeting on the cost competitiveness of its Fastfoot subsidiary. This should include budgeted and actual procurement costs for 2018 at its Ofena and Navelli supply sources. Clemenza decides to visit the two supply operations. The budgeted average procurement cost for 2018 was $14 per pair of shoes. This includes payments to the shoe manufacturer and all other payments to conduct business in each country. Clemenza reports the following to Stylish:

Ofena. Total 2018 procurement costs for 250,000 pairs of shoes were $3,900,000. Payment to the shoe manufacturer was $3,108,000. Very few receipts exist for the remaining $792,000. Kickback payments are viewed as common in Ofena.

Navelli. Total 2018 procurement costs for 900,000 pairs of shoes were $12,300,000. Payment to the shoe manufacturer was $10,136,000. Receipts exist for $827,000 of the other costs, but Clemenza is skeptical of their validity. Kickback payments are a "way of business" in Navelli.

At both the Ofena and Navelli plants, Clemenza is disturbed by the employment of young children (many of them under 15 years). She is told that all major shoe-producing companies have similar low-cost employment practices in both countries.

Stylish is uncomfortable about the upcoming presentation to the board of directors. He was a leading advocate of the acquisition. A recent business magazine reported that the Fastfoot acquisition would make Gutfield Products the global low-cost producer in its market lines. The stock price of Gutfield Products jumped 21% the day the Fastfoot acquisition was announced. Clemenza, likewise, is widely identified as a proponent of the acquisition. She is seen as a rising star due for promotion to a division management post in the near future.

Required

1. What summary procurement cost variances could be reported to the board of directors of Gutfield Shoes?

2. What ethical issues do (a) Stylish and (b) Clemenza face when preparing and making a report to the board of directors?

3. How should Clemenza address the issues you identify in requirement 2?