The hypothetical scenario described here is based on a compilation of anecdotes taken from the literature on responsibility accounting, quality management, and environmental cost accounting. Houda Kabbaj, the controller for Labban Enterprises, 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 major cuts:

Cost Cost Cost item Reduction ($) Reduction (%) General employee training $ 12,000 25%Routine machine maintenance 13,500 20Process improvement 12,000 12Quality training* 18,000 8Raw-material inspection* 6,500 9Product redesign for compliance with environmental policies 7,100 13Random testing of materials for Environmental contaminants 11,200 10 *Categorized as quality costs. Categorized as environmental costs.

Concerned that they may have been errors in computing the data, Kabbaj scheduled an appointment with the regional vice president, Ahmed Edelbi. At the meeting, conversation went like this.

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

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

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

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

Kabbaj (C): Have you thought about through the implications, Ahmad? 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.

Edelbi (VP): Becoming annoyed. Those are my concerns, Ms. Kabbaj, not yours.

Kabbaj (C): Look, Ahmad, were all on the same team. Im just concerned, thats all. Im especially worried about these cuts in quality and environmental costs. These quality costs are in the areas of prevention and appraisal. If we make these cuts now, well likely have higher costs for internal, or even external, failure down the road. And the same goes for these environmental cost cuts. If we scrimp on monitoring and abatement costs, were just going to be shelling out more for remediation costs in the future.

Edelbi (VP): Those are all hypotheticals. You dont know any of that for sure.

Kabbaj (C): 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.

Edelbi (VP): No, Houda. You are instructed to make your usual quarterly report using the standard format.

After the meeting, Kabbaj was commiserating with Faisan Ali, the chief of engineering.

Kabbaj (C): Faisan, I just had a very unsatisfactory meeting with Ahmad Edelbi, I shouldnt go into the details, but Im concerned about some things.

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

Kabbaj (C): That explains a lot, Faisan. Thanks for the information. Ive got some thinking to do.

What do you think is going on here? What is the VP, Ahmad Edelb, trying to do? Is he acting ethically? What steps should the controller, Houda Kabbaj, take? Also, how could a balanced scorecard help mitigate the problems apparent in this scenario?