Review Case 5.42 in your textbook. Using the questions providedas a guide, create a memo to Mayfield from Duvall that addressesthe issues [from Duvall's perspective].

Submit your assignment as a Word document (400-750 words).

General Requirements:
Save your assignment (Word) asLastname_FirstnameACC650_T3.docx.
You are required to utilize a Memo template format.
At least two external sources should be cited on a separate page,not including the textbook.

Prepare this assignment according to the guidelines found in theAPA Style Guide, located in the Student Success Center. An abstractis not required.

5.42 (LO 1, 3, 4, 5) Ethics and budgeting Faced with three youngchildren who were always complaining “I’m bored,” Ann Newton lookedfor an interesting after-school activity. Finding nothing availablein the community, she decided to solve her problem by renting anold bakery and turning it into Kiddie Kitchen. Three afternoons aweek, Ann, her children, and several other children gathered tolearn the art of cooking. In less than five years, Ann’s businessgrew to over 30 franchised kitchens located throughout the state.In 2005, she retired from active management of the company and soldthe majority of her stock to Bernice Mayfield, who now runs thefirm.

Today, Kiddie Kitchen has 100 franchised locations and 50corporate locations up and down the East Coast. The company isorganized into five regional territories, each run by a directorwho reports to the vice president of operations. In addition to thevice president of operations, executive management includes theCFO, the vice president of marketing, and the vice president ofhuman resources. All executive personnel work at the corporateheadquarters, now located in Raleigh, North Carolina. Each directormaintains a regional office, complete with an administrativestaff.

Shortly after taking over the company, Mayfield revamped thebudgeting process, replacing a bottom-up process that had been inplace since the early 1990s with a top-down process. Since the newbudget process influences the bonus compensation a director canearn, directors have a great deal of interest in developing thebudget. At the beginning of the budget cycle, regional directorsreceive corporate directives concerning the coming year’s budget.These directives include projected growth in locations and revenue,salary increases, and allocated corporate expenses. Directorsprepare three budgets—one for franchised locations, one forcorporate locations, and one for administrative costs associatedwith the regional offices. These budgets are passed up to thecorporate office for consolidation into the corporatebudget.

Max Green is director of the southeast region. His approach topreparing the budget for the coming year budget is a typicalexample of budget preparation. He passed the corporate budgetdirectives to his accountant, Henri Duvall, who prepared the firstdraft of the budget. When Green reviewed the draft, he did not likewhat he saw. Budgeted net income was too high—so high that hisregion would never meet the target. He asked Duvall to make someadjustments.

The corporate directive had projected a general price levelincrease of 2–4%. The range was intended to allow highercost-of-living areas, such as Boston and New York, to budget higherlevels of cost increases than lower cost-of-living areas. But eventhough Green’s office was located in the lowest cost-of-living areain the country, he told Duvall to budget an across-the-boardincrease of 4%. Green knew that as long as he was within thedirective’s guidelines, the corporate office wouldn’t question theincrease.

Green also told Duvall that the region would open ten newstores during the coming year and that the budget should reflectenough start-up expenses to cover the new locations. Green knewthat no region had ever opened more than seven stores in a singleyear. In fact, he thought he would be lucky to open five new storesin the coming year.

Since Green had a reputation for retaliating against employeeswho chose to ignore his requests, Duvall made the changes withoutquestioning them. The result was a $250,000 reduction in budgetednet income.

Duvall, a certified management accountant, had a wife and threechildren, and could not afford to lose his job and his generousbenefit package. Besides, his wife was in line to become owner ofone of the new franchised stores in the coming year.Required

a. Why would Green care about the level of budgeted netincome?

b. What do you think Mayfield’s reaction would be if she learnedof Green’s actions?

c. What does Duvall have to gain from his actions? Does he haveanything to lose?

d. Refer to the IMA’s Statement of Ethical Professional Practicein Exhibit 1.8 (pages 1-20 and 1-21). What responsibilities doesDuvall have in this situation? Did he violate the Statement? If so,how?