Wellness Pharmacy is a publicly held corporation with drugstores throughout the northern Illinois region.Each drugstore is operated by a general manager, who is responsible for day-to-day operations and by a controller, who is responsible for financial tasks including preparation of the budget.Sharon Statin, the general manager, of the Dekalb store, has been with the company for several years.Due to employee turnover, which is common in the retail industry, she recently hired a new controller, Diego Rivera.

Sharon asked Diego to prepare the annual master budget.Each retail pharmacy store prepares its budget once a year and then submits that budget to company headquarters for approval.Once it is approved by headquarters, the master budget is used to evaluate the store's performance.These performance evaluations directly affect the managers' bonuses and whether additional company funds are invested in that location.

After reviewing the budget Diego had prepared, Sharon instructed him to increase the amounts budgeted for labor and supplies by 20%.When Diego asked why, Sharon responded that this budgetary cushion gives store management flexibility in running the store.For example, because company headquarters tightly controls operating funds and capital improvement funds, any extra money budgeted for labor and supplies can be used to replace store furnishings or to pay bonuses to help to retain good employees.She explains that the chance of getting extra funds from company headquarters is not good; thus "cushion" is usually the only opportunity to replace store dcor or to pay bonuses to key

employees.Sharon also needs extra funds to occasionally make "under the table" payments to employees as incentives to work extra hours or to keep them from leaving for a higher-paying job.

Diego feels conflicted.He is eager to please Sharon but is wondering what he should do in this situation.

Question

1.Diego thinks that the behavior described by Sharon may be unethical.By referring to the IMA's Statement of Professional Practice in the Prologue on page 10 of the textbook, explain why the use of budgetary slack may be unethical.