Topic 2 Ethics in Management Decision Making Foleo Fones CHAPTER 2 The 1990s In response to quality problems and other significant overseas supplier concerns, including price, delivery and trading terms, James and Leon decided to investigate the possibility of manufacturing their own phones in Australia. The boys had engaged on numerous occasions with their suppliers to negotiate terms, but had come away from every encounter feeling that they were powerless to effect any change in their terms of trade. In addition to the supplier issues, James was receiving feedback that the imported phones were no longer meeting the specific needs of their local customers (as the products were customised to U.S. consumers). So, whilst the Foleo Fones distribution business was continuing successfully and accumulating profits, the boys invested these profits in research and development to assess the feasibility of opening a production plant in Western Sydney to manufacture their own mobile phones. As part of their feasibility assessment, James needed to look at the financial health of Foleo Enterprises Pty Ltd, to determine whether they would be in a position to ask the bank to finance their new venture. Whilst the business was growing and reasonably profitable, they had very real cash flow problems. Much of the disposable income had been redirected into paying for the research into the new venture, leaving depleted reserves in the bank. James knew that this would be problematic for them when the bank saw their financial statements. In the deep, dark recesses of his mind (from around the time he was studying his commerce degree), he seemed to remember something about creative accounting techniques to improve the look of the financial statements, and called a meeting with the companys management accountant to discuss some options. James was convinced that the accounts needed to be temporarily tweaked, just a little, to improve their chances of acquiring the funding they needed to move forward with their manufacturing business. The management accountant was not so sure. What ensued, were some very robust discussions between the management accountant and the boys about such issues as, the classification of expenses, the treatment of liabilities and the value of inventory stocks on hand. The suggestions being made by James were dubious at best and downright dishonest at worst, a point which the management accountant made repeatedly, as he respectfully declined to alter the accounts. Ultimately, by the end of 1992 and after many heated exchanges between the directors and the management accountant, Foleo Enterprises Pty Ltd had finally secured the finance required to set up a manufacturing plant from the bank. The boys had sourced a factory premises, machinery and sufficient staff to embark on manufacturing their own Foleo Fones, and in late February of 1993, the first Australian-made Foleo Fone was on the shelves of the newly branded Telstra shops, ready for sale. The mobile phone industry was volatile and constantly changing not only in terms of the technology for the products that Foleo Fones were selling, but also the network technology, which underpinned and ultimately drove the product technology. As an example, April 1993 saw the introduction of the digital network in Australia, which meant that new digitally-compliant phones needed to be designed, as the analogue technology would soon be phasing out. Foleo Fones responded by doing what they did best they adapted!! They again invested in R&D to design new models of phones with digital technology. They introduced their digital range of mobile phones to the market significantly later than their competitors, but in spite of this, they sold well and Foleo Fones were able to slightly increase their share of the market. Throughout the 1990s, the directors found themselves constantly at odds with the management accountant. It seemed that at every meeting, there was an issue of concern that needed to be resolved. First it was the creative accounting issue in 1992, then it was private transactions found in the company accounts, then it was concerns about customers health due to increased radiation exposure from the mobile devices, then it was missing expenses from the accounting records and so the list went on. James attempted to play down the concerns of the accountant and tried to explain them away, but found that this resolved nothing and resulted in more heated exchanges between them. Leon was less patient with the accountant and simply walked out of the meetings. Even though the Author: Julie Fell 2 management accountant was very good at his job, it got to the point, where the directors considered firing him, as they felt they were no longer able to work with him. After serious consideration, they instead hired an upper level Management Accountant (or Chief Financial Officer, CFO), in 1997 to act as a buffer between them and to manage what they saw as a problematic employee. Upon the arrival of the new CFO at Foleo Enterprises, James and Leon ensured that most of the duties that had previously been handled by the management accountant, were now diverted to her. The redistribution of this workload did not go unnoticed by the management accountant, nor by the CFO. On a number of occasions, the management accountant protested to his new boss, that he had very little to do, now that the CFO was undertaking even the most menial of accounting work. He felt as though he was being punished for maintaining his professional integrity and complying with a code of ethics that was imposed on him by the accounting body to which he belonged. In the months that followed the CFOs appointment, the situation worsened for the management accountant. His new supervisor was understanding and tried, unsuccessfully, to stand up to James and Leon. She attempted to explain to them that it was impossible for her to undertake the higher-role duties they employed her to do, when she was also expected to attend to the number crunching work. The management accountant got sufficiently frustrated on one occasion, that he contacted the local paper and made an appointment to speak with a journalist. He revealed this to James the day before he was due to meet with the journalist, and remarkably, the situation improved. James immediately backed down and agreed to a meeting with the accountant and the CFO to redefine their roles, if he would cancel the appointment with the journalist. This meeting seemed to defuse the situation and with their roles clarified, the accountant and the CFO were able to work together in a more cohesive manner. With this issue now resolved, James and Leon were able to focus their attention back onto what was important the business of growing the Foleo Fones market share. In reality, Foleo Enterprises Pty Ltd was only a small player in their industry, competing against their heavy weight rivals, such as NEC, Philips, Nokia, Motorola and Erikson (and later, Apple and Samsung). However, in spite of this, the business continued to succeed in the local Australian market over the 1990s, predominantly because they listened to their customers and responded to their demands, even if this meant completely transforming their business model and the products they offered to the market. Chapter 3 of the Foleo story will look at how Foleo Fones responds to the constant changes in their industry and how the boys manage the next stage of their business.