SHORT-SIGHTED VIEW OF COST CUTTING

Jamie Ericsson, the controller for Handico, has just compiled a cost report for the second quarter. The report is prepared each quarter for corporate headquarters. She has taken particular notice of several major cost categories that show significant reductions in expenditures when compared to the first quarter. She made the following list of the major cost cuts:

Cost Item

Cost Reduction ($)

Cost Reduction (%)

General employee training

$12,000

25%

Routine machine maintenance

13,500

20

Process improvement

12,000

12

Quality training

18,000

8

Raw-material inspection

6,500

9

Concerned that there may have been errors in compiling the data, Ericsson scheduled an appointment with her supervisor, Les Winters, the divisional vice president. At the meeting, the conversation went like this.

Ericsson (C): Les, Im concerned about these cost cuts. Are these mistakes, or are we really making such substantial cuts in these areas?

Winters (VP): Your numbers look right, Jamie. I ordered these cutbacks myself. I think theres a lot of fat in this operation that can be cut, and Im just getting started.

Ericsson (C): But these are all important areas to invest in, Les. I see the invoices for these costs every month, and I dont think its wasted money at all.

Winters (VP): Corporate wants a lean company, Jamie. Im just trying to give them one.

Ericsson (C): Have you thought through the implications, Les? Cutting general employee training will eventually take a toll on our productivity gains. Same thing for the cuts in process improvements. And cutting routine machine maintenance could mean breakdowns later on. Maybe not for a year or so, but eventually itll take its toll.

Winters (VP): Becoming annoyed, Those are my concerns, Ms. Ericsson, not yours.

Ericsson (C): Look, Les, were all on the same team. Im just concerned, thats all. I feel as though I need to highlight these cost cuts in my report to corporate. They should at least be made aware of these issues. Ill need your authorization for that.

Winters (VP): No can do, Jamie. You are instructed to make your usual quarterly report using the standard format.

After the meeting, Ericsson was commiserating with her close friend, Amy Ling, the chief of engineering.

Ericsson (C): Amy, I just had a very unsatisfactory meeting with Les Winters. I shouldnt go into the details, but Im concerned about some things.

Ling (E): Well, I have good news for you then. The grapevine has it that Les is on the very short list for taking over as president of our Japanese subsidiary. That would be a huge promotion for him. Word is that all Page 533hes got to do is turn in a good performance for the year here. If he does that, the jobs his.

Ericsson (C): That explains a lot, Amy. Thanks for the heads up. Ive got some thinking to do.

What do you think is going on here? What is the VP, Les Winters, up to? Is he acting ethically? What steps should the controller, Jamie Ericsson, take? (Refer to the Resolution of Ethical Conflict section of the IMA Statement of Ethical Professional Practice, printed at the end of Chapter 1.) How could a balanced scorecard help mitigate the problems apparent in this scenario?