Jardin Industries produces and distributes industrial chemicals. Jardins earning increased sharply in 2015, and bonuses were paid to the management staff for the first time in several years. Bonuses are based in part on the amount by which reported profit exceeds budgeted profit.

Johari, the finance director, was pleased with Jardins 2015 earnings and thought that the pressure to show financial results would ease. However, Elina, Jardins managing director, told Johari that she saw no reason why the 2016 bonuses should not be double those of 2015. As a result, Johari felt great pressure to increase reported profit well above the budgeted profit. This would assure increased bonuses.

Johari met with Bukhari of Botanique Ltd, which supplied most of the companies manufacturing supplies and small equipment. Johari and Bukhari have been close business contacts for many years. Johari asked Bukhari to invoice Jardins purchases of perishable supplies as equipment. Johari told Bukhari that Jardins managing director had imposed stringent budget constraints on operating costs but not on capital expenditures. Bukhari agreed to do as Johari had asked.

Johari planned to capitalized the purchase of perishable supplies and include them with the equipment account on the balance sheet. This way, Johari could defer the full expense recognition for these items to later years. This would increase reported profits, leading to increased bonuses.

While analyzing the fourth-quarter 2016 financial statements, Gambit, Jardins accountant, noticed a large decreased in the cost of supplies compared with that of last year. Gambit reviewed the supplies account and noticed that very few supplies had been purchased from Botanique, a major source of supplies. However, there had been large purchases of equipment from Botanique. Gambit, who reports to Johari, immediately brought this to Joharis attention. Johari told Gambit of Elenas high expectations and of the arrangement made with Bukhari of Botanique. Gambit told Johari that his action was an improper accounting treatment for the supplies purchased from Botanique. Gambit requested that he be allowed to correct the accounts and urged that the arrangement with Botanique be discontinued. Johari refused the request and told Gambit not to become involved.

After clarifying the situation in a confidential discussion with an objective and qualified peer within Jardin, Gambit arranged to meet with Elena, Jardins managing director. At the meeting, Gambit disclosed the arrangement Johari had made with Botanique.

REQUIRED:

Discuss the ethical issues involved in this scenario (E.g: whether the actions of Johari and Gambit were appropriate or inappropriate). You may include in your discussion the purpose/importance of budget, how the management bonus system causes budget pressure, the implication of the alternative accounting methods suggested or other related matters.