IMA EDUCATIONAL Case Journal Case Study A Tale of Missing...Parts Nit/201a; J. Fess/er, CMA, CPA T lie University of Texas at ller INTRODUCTION Unlike other examples of unethical behavior you might study, no one described in this case became ridiculously wealthy or wound up in prison in South America; no one was sued nor did a business fail. In fact, no one even lost their job. Yet ethical challenges occurred; the events portrayed herein have been disguised and ctionalized, but they largely occurred as described. That is to say, the events of this \"tale\" are not ction but rather historical fact. A DISAPPOINTING PERFORMANCE EVALUATION Alan left his performance evaluation confused and a little angry He had recently accepted a position at the division level where he was part of a small group that reported directly to Doug Stevens, the division accounting and nance manager (without an intervening accounting and nance supervisor). This was the rst performance evaluation Alan experienced with his manager. Alan's performance evaluation rating was lower than he had expected, for two reasons. First, Doug told Alan that he (Doug) was limited in the number of high ratings he could give employees, so there were not enough high ratings available for Alan to receive one, too. Second, Doug reminded Alan that he (Alan) been involved with the Parts Catalog Solution (PCS) project. From Alan's perspective, he had performed his job not only correctly but well; he used the information he was provided to correctly prepare the nancial forecast and the supporting documentation required by the The Association of Accountants and Financial Professionals in Business ISSN 1940-204X upper management review team. Therefore, he was surprised to learn that his involvement with the project was serving as a black mark lowering his performance evaluation rating. For the record, he agreed with neither reason; however, that did not change his performance evaluation rating. THE BEGINNING: ALAN AND THE PCS PROJECT Alan learned about the history of the PCS project from the project leader. Keith. The tale began quite simply with a major manufacturer of motorized apparatuses, Green Engines, announcing that, effective at the end of the year, the company would no longer supply parts catalogs in a CD (compact disc) format to its dealers free of charge. It was April of that very year when Alan had his rst meeting with Keith, who explained that at the end of the year, dealers would have two choices of products they could use to replace the free parts catalogs. The rst choice would be for dealers to purchase the digital copies of the same materials from Green Engines (Green Engines was simply tired of incurring costs associated with providing this data); this would be the least-expensive option for dealers and would utilize the same ordering processes that dealers were already familiar with. The second choice would be for dealers to subscribe to a continuously updated online solution. This was a more expensive option for the dealers but also a more functional choice. An online solution offered an easier way to nd the desired part(s), and orders could be placed directly via the online system; there was no need for CD updates or to separately place orders. IMA EDUCATIONAL CASE JOURNAL n VOL.12,NO. 3, ART. 2, SEPTEMBER 2013 2019|MA Alan and Keith were both employed by one of the three competing companies that had developed an online solution: More Than Parts, Inc. (MTP). a large, multinational corporation. MTP had developed an online parts catalog solution that was already being betatested by a limited number of Green Engines dealers. MTP's two competitors were already selling their comparable products to dealers, so MTP was the slowest competitor getting its product to the market. Yet PCS was arriving with arguably the most technologically sophisticated offering of the three competitors, which would hopefully benet MTP. ABOUT ALAN Alan. the proverbial hero (or perhaps villain) of this tale, had graduated with a degree in accounting and has worked for MTP for nearly two years. Before beginning work, he had taken and passed both the CMA (certied management accountant) exam and CPA (certied public accounting) examon his rst try, Alan might addand was currently in the process of completing the necessary work experience so he could add those valuable initials to his business cards.1 Alan was working as a nancial analyst, a position that any accounting or nance graduate could apply for; for example, the colleague in the cubicle next to Alan was an undergraduate nance major who had been hired directly into the position he currently held (very similar to Alan's). Alan was a little more experienced than this colleague because Alan was the veteran of a training program and was in his fourth position at the company. One of the tasks Alan performed in his role as nancial analyst was to provide cost accounting support for new product proposals, like the PCS project. THE DEVELOPMENT TEAM FOR THE PCS PROJECT The PCS development team was a crossfunctional group comprised of a number of individuals. Alan's primary source of information was Keith, the champion of the PCS project. Keith's education background was in programming and software development. Keith had been part of the PCS development team from its inception, which means that he participated in the twoyearlong effort to develop the software and technology required to make PCS successful. Keith was energetic, charismatic, intelligent, and hardworking. For example, during those two years of development, Keith did not take a vacation. During the projectapproval process, Keith spent a few days at the beach with his wife and children, but he seemed to leave the ofce and take the vacation reluctantly. While on his short Vacation, Keith stayed in contact with the rest of the team, including Alan, via email and text. Alan thought Keith acted as though he had staked his career on the success of this project. Maybe he had; he seemed almost fanatical that MTP should be in this business. Because Green Engines was no longer going to supply CD catalogs for free, Keith considered this a rare opportunity to develop a strong foothold in what was effectively going to be a new market. The two other PCS team members that Alan interacted with were Jane and John; they were technically capable systems engineers who helped Keith. Like Keith, they had helped develop the software and technology for the PCS project; they were currently helping complete the project's development and get the project approved by the upper management review team. After project approval, Jane and John would assist with the maintenance of the PCS software and provide technical support to dealers who purchase the prod uct. Then there was Alan, the nancial analyst, who was recently added to the team to provide accounting and nance support for the projectapproval process. Alan's duty as a nancial analyst was to serve the Operations Division of MTP, Inc., of which Keith was a part. Alan's responsibilities included preparing annual budgets, monthly outlooks. variance analysis, and other special projects for the Operations Division manager. Alan was also responsible for providing revenue and cost summaries for new business proposals like Keith'sin short, \"costing\" a project proposal. Alan was assigned to the development team by Howard, Alan's supervisor. Howard was a tall, quietspoken man, perhaps seven years older than Alan. Like Alan, Howard had been hired by MTP right after college. Alan and Howard had a good relationship, perhaps in part because they both were graduates of the same corporate training program for accounting and nance professionals. Howard respected Alan and the work he performed on behalf of the operating division both of them supported. Alan recalls that the approvalprocess for the PCS project lasted many weeks and, on a number of occasions, involved late nights at work, particularly on those days when Alan was asked to revise the analysis after 4 pm. (an effort that 1 While an important milestone, passing the exams did not mean Alan was yet a CMA or CPA. In addition to passing the exam, both CMA and CPA candidates must acquire the necessary work experience before they can be considered a CMA or CPA (which, for the CPA, differs from state to state). So, while Alan had already passed the CMA exam, he had not yet met the work experience requirement. IMA EDUCATIONAL CASE JOURNAL a VCIL.12,NO. 3, ART. 2, SEPTEMBER 2013 typically required several hours of work). Keith, however, was a charismatic individual and clearly communicated his appreciation for Alan's efforts on behalf of the team. Alan remembers one night, in particular, toward the end of the projectapproval process, when he, Keith, and Jane were leaving the ofce about midnight, and Keith told Alan: \"I would be happy to have you on my team any time.\" But consistent with the complexities of modern business, Alan functioned simultaneously as a member of two distinct teams. Keith was not Alan's boss and did not give him performance evaluations or raises. Neither did Keith's manager. Rather Alan reported to his own accounting and nance organization management hierarchy. Like many other organizations, businesses, and corporations, the accounting and nance function at MTP had its own hierarchy and reporting structure. Financial analysts reported to a supervisor in the accounting and nance organization (Alan's supervisor was Howard). Accounting and nance supervisors reported to managers in the accounting and nance organization (Alan and Howard's manager was Doug Stevens). Accounting and nance managers reported to the corporation's chief nancial ofcer (CFO). When working late into the night to improve the chance of success of Keith's team's project, it was easy for Alan to forget that he was a member of not only Keith's PCS project team but also Howard's accounting and nance team. Alan found project costing to be one of the most fun and rewarding parts of his job, because he realized that successful and protable new business proposals like PCS are critical to improving the protability of any company or corporation. Alan's role in the process was critical. Accounting and nance professionals in many organizations are often asked to provide a gatekeeping function where they are expected to ensure that the nancial information in business forecasts for new projects is as accurate as possible so that decision makers can make the best decisions. At the same time, however, the primary source of information about new projects is typically someone outside the accounting and nance organizationlike Keith. THE FINANCIAL FORECAST, PREPARED BY ALAN Alan prepared the veyear nancial accounting forecasts used by the upper management review committee to make a decision about whether or not to approve and fund the project, using the information provided by Keith. See Figure 1 for a Visual summary of the major actors the PCS project team was interacting with during this project. Alan remembers that at the time of the case, there were roughly 1,000 Green Engines dealers in the United States; most dealers were using the free CD catalogs provided by Green Engines. Based on information the salespeople provided to Keith, they estimated that 20% of all dealers had already subscribed to an online parts catalog product offered by one of PCS's competitors. Additionally, the salespeople and the PCS team expected that 50% of the remaining dealerships would purchase CD catalogs, while the other 50% would subscribe to an online parts catalog from PCS or one of its two other competitors (see Figure 2). Alan incorporated all of this information into the nancial forecasts. PCS had advantages over its competitors because MTP's product was better than that of its competitors and because MTP was a subsidiary of Green Engines; its competitors had an advantage over PCS because they had competing products that were already available on the market for purchase and use. Alan knew that other programmers and technical staff had participated in the twoyear development of PCS (in addition to Keith, Jane, and John), but those individuals would be moving on to other projects. The development cost of PCS was not included in the analysis prepared by Alan, as those costs had been borne elsewhere (and were economically \"sunk\" and irrelevant for purposes of the analysis prepared by Alan). Yet once the project was approved, salespeople and additional help desk/support personnel would be added to the team, and the cost of all those individuals were included by Alan in the nancial forecast. First, seven salespeople were expected to join the project and would be responsible for selling PCS to Green Motors dealers. The salespeople were, practically, \"leftovers\" from another dealertargeted project that was unsuccessful; unfortunately, MTP at the time did not have a good track record for selling products like PCS to Green Engines' dealers. Second, three additional help desk/support employees would also be added to the team to assist and support Jane, John, and Keith. Alan had previously prepared nancial forecasts for a number of other project proposals and knew that a nancial forecast was comprised of many lines of information. Typically, the rst portions of the forecast prepared were the income statement and balance sheet, which included expected revenues, expected expenses, and expected acquisition of assets for the proposed project. The cash ow effects, and a number of performance measures such as ROI (return on investment) and NPV (net present value), were then calculated based on those inputs. IMA EDUCATIONAL CASE JOURNAL a VCIL.12,ND. 3, ART. 2, SEPTEMBER 2013 The information items that Alan used to prepare the nancial forecast for PCS are presented in Figure 3, in the format of an income statement. It is important to remember that Alan included only relevant costs in the analysis; that is, only new revenues and costs that would be created and incurred by the proposed project were included in the forecast. Based on the forecast prepared by Alan, the upper management review committee approved the project, the sales force and additional help desk/support personnel were brought on board, and the team went about the business of selling PCS to as many dealers as possible before the end of the year. UNEXPECTED TWISTS AS EVENTS CONTINUED The rst unexpected twist was learned very shortly after the PCS project's approval: there was a signicant missing \"part\" to the analysis prepared by Alan that should have been included in the original project forecast. The dollar value of the missing information was large enough that it, by itself, required approval by the upper management review committee. Please note that approval by the upper management review committee was required to receive funding for new project expenditures in excess of a threshold amount of US$100,000. Errors in the forecast did not require approval (although the project manager could be expected to be held responsible for a project's success or failure); rather upper management approval was required because new (additional) expenditures were being requested that were not included in the original forecast, and they exceeded the approval threshold. Alan prepared the updated the forecast, which was then formally approved by the upper management review committee. Yet the rumor mill and Alan's performance evaluation conversation with Doug Stevens suggested that upper management review committee members were not amused that this information was not included in the original project proposal; Alan would point out that neither did the committee members notice the missing information (and could have noticed and questioned it just as easily as Howard or Alan). Because the original project proposal was not memorably protable, it was unclear how such information might have changed the original decision; that is, it was possible that the upper management review committee might have rejected the project if all relevant nancial information had been included in the original nancial forecast. The second unexpected twist was that as soon as PCS ofcially entered the market, \"market\" prices fell dramatically because competitors lowered their prices. As a result, the project was almost immediately less protable than had been projected. With the benet of hindsight, it is reasonable to expect that when a major new competitor enters a market that market prices will adjust, but such an expectation was not incorporated into the forecast. The third and nal unexpected twist was that international sales, not included in the original forecast, were substantial and improved the project's protability. Green Engines' sales were primarily in the United States with the vast majority of its dealers located in the continental United States. Therefore, little thought was given to international sales in the original forecast. A few international dealers existed, however, and some of them were big (as in, they were among the largest dealers in the world). Many of those dealers chose to subscribe to not just one PCS but to ve or six of them to use in multiple locations at the dealer's large facility. TH E ACTORS There are three main actors in this story who, in some combination, were responsible for the missing \"part\" of the nancial forecast. The forecast was prepared by Alan. As we learned in the opening paragraphs, the project was a black mark on his following performance evaluation. Howard was Alan's supervisor at the time of the case, and he received a demotion (from supervisor to senior nancial analyst) in large part because of his role in this tale. Howard did not prepare the forecast and trusted Alan's competency, but perhaps he could have asked more critical questions when he reviewed and approved Alan's work. Keith was the project champion; he remained on the team and continued to champion and lead the project, suffering no ill effects of the project-approval process snafus. Keith was determined to ensure that the PCS project occurred. Therefore, with the benet of hindsight, it seems reasonable to conjecture that Keith may have been willing to \"stretch\" the prospective nancial numbers a bit to ensure the approval of the project, or maybe he \"forgot\" to tell Alan about. . .some parts. Alan thinks this may very well have occurred. He remembers that he asked Keith about the information that later proved \"missing\" and that Keith claimed those resources would be transferred to the project from the cost center where the development effort occurred. That transfer clearly did not happen, so the PCS project needed to request additional resources, and a second request for additional funds was made of the upper management review committee. Alan does not know whether Keith genuinely IMA EDUCATIONAL CASE JOURNAL n VCIL.12,ND. 3, ART. 2, SEPTEMBER 2013 thought the transfer would occur and then it did not, or 4. As a CMA candidate, Alan was subject to the IMA whether Keith intentionally misled Alan. Alan was inclined Statement, as was Howard as a CMA. But Keith was to believe that Keith would have been willing to mislead (or neither a CMA nor an IMA member and was not subject outright lie to) him given Keith's emotional and professional to the IMA Statement. Would you hold Alan and Howard investment in the PCS project. Alan continues to claim about to a different standard of ethical behavior than Keith? the PCS project: "I did my job right." Why or why not? At this point it no longer matters what Alan thinks; but rather what do you think? Do you think Keith lied to Alan, 5. Do you agree with Alan that he "did his job right"? What or not? Does your opinion of Alan (and Howard) change do you think Alan should learn from his experience? depending on whether or not Keith lied? 6. Largely as a result of the events described in this case, Alan's supervisor was demoted but performed none of the ASSIGNMENT QUESTIONS analysis on the PCS project (Alan did). Does this seem fair or just? Why or why not? Does your answer change 1. What do you think was the missing "part" of the forecast depending on whether Keith was honest or deceitful in prepared by Alan? Remember that the dollar amount his dealings with Alan? was large enough that the missing amount also had to be 7. How might the three main actors have applied the IMA approved by the upper management review committee before the project could continue. Statement (and its guidelines for Resolving Ethical Issues) to resolve the ethical issues that occurred? Alternatively, 2. What do you think is the most significant ethical issue in what could be done by the three main actors, or their the case? Please explain. Be aware that your answer to this managers, to ensure that the events described in the case question should frame your answers to the remaining questions; would not occur again? that is, this answer should guide your attitudes toward the characters in the case. 3. Do you feel that Alan and Howard (Alan's supervisor) ABOUT IMA (INSTITUTE OF MANAGEMENT ACCOUNTANTS) behaved in accordance with the IMA Statement of Ethical IMA, the association of accountants and financial professionals Professional Practice? Why or why not? in business, is one of the largest and most respected associations focused exclusively on advancing the management accounting profession. Globally, IMA supports the profession through research, the CMA (Certified Management Accountant) program, continuing education, networking and advocacy of the highest ethical business practices. IMA has a global network of more than 100,000 members in 140 countries and 300 professional and student chapters. Headquartered in Montvale, N.J., USA, IMA provides localized services through its four global regions: The Americas, Asia/Pacific, Europe, and Middle East/India. For more information about IMA, please visit www.imanet.org. IMA EDUCATIONAL CASE JOURNAL 5 VOL. 12, NO. 3, ART. 2, SEPTEMBER 2019Figure 1: The Groups Involved More Than Parts (MTP) Upper Management Review Committee [Forecast] $5 (Funding) Parts Catalog Solution (PCS) Team Green Engines Dealers Green Engines Dealers Green Engines Dealers Green Engines Dealers Green Engines Dealers lMA EDUCATIONAL CASE JOURNAL a VUL.12,NO. 3, ART. 2, SEPTEMBER 2013 Figure 2: The Market 1,000 Green Engines Dealers in the U.S.: 50% Expected to Purchase CD Catalog from - 20% Green Engines Already Purchased Competing Online 50% Expected to Purchase Catalog 1' Online Parts Catalog from MTP (PCS) or a Competitor Figure 3: Forecasted Income Statement Items All information was provided to Alan by Keith ' Only relevant revenues and costs were included in the forecast Revenue 1. All forecasted sales were for U.S. dealers (all salesmen were based in the 0.5.). 2. Estimated that half of all new online parts catalog sales would go to PCS; effectively a 50 percent market share was expected (in a market inhabited by three competitors). 3. All products were priced at the market price in existence at the time the financial forecast was being prepared (before the actual entry of PCS into the market). Expense 1. Salary/benefits expense for management (Keith). 2. Salary/benefits expense for helpdesk/support personnel: Jane, John and three additional employees to be hired. 3. Office space, telephone, and utility expense for the office personnel (management and helpdesk/support personnel). 4. Salary/benefits expense for the seven member sales force to be hired. Miscellaneous expenses including the costs and upkeep of servers, website, and database. 6. The salesmen provided their own working space, telephone, transportation, and computer/internet access out of their compensation (so no expense was included in the forecast for these expenses). .0" IMA EDUCATIONAL CASE JOURNAL VOL. 12, ND. 3, ART. 2, SEPTEMBER 2013