Senior management of ABC Company has often been known to run strictly based on the numbers. The companys chief financial officer (CFO) identifies target profit goals for each of the companys divisions.

In early October, Bob Smith, the general manager in charge of the electronics division, saw that making the current years target profit for his division was going to be extremely difficult. Mr. Smith also directed the division managers to defer all discretionary expenditures until the first quarter of next year.

On December 1, he was angered to find out that warehouse personnel had ordered $500,000 of component parts in mid-November even though the parts were not needed until February or March of next year.

Contrary to generally accepted accounting principles (GAAP), ABCs accounting procedures manual states that purchases of such parts are to be expensed when delivered. Mr. Smith asked that the order be canceled to avoid reporting the expense. However, the purchasing department informed Mr. Smith that the parts had already been delivered and the supplier would not accept any returns.

Since the bill for the parts had not been paid yet, Mr. Smith asked his accounting manager to correct the warehouses mistake by delaying recording of the delivery until the bill is paid sometime in mid-to-late January.

1. Are Mr. Smiths actions ethical? Why or why not?
2. Do you feel that the accounting policies and general management philosophy at ABC encourages or discourages ethical behavior? Explain.