PROBLEM 2–20 Ethics and the Manager [LO2]
The top management of General Electronics, Inc., is well known for “managing by the numbers.” With an eye on the company’s desired growth in overall net profit, the company’s CEO (chief executive officer) sets target profits at the beginning of the year for each of the company’s divi- sions. The CEO has stated her policy as follows: “I won’t interfere with operations in the divisions. I am available for advice, but the division vice presidents are free to do anything they want so long as they hit the target profits for the year.”
In November, Stan Richart, the vice president in charge of the Cellular Telephone Tech- nologies Division, saw that making the current year’s target profit for his division was going to be very difficult. Among other actions, he directed that discretionary expenditures be delayed until the beginning of the new year. On December 30, he was angered to discover that a ware- house clerk had ordered $350,000 of cellular telephone parts earlier in December even though the parts weren’t really needed by the assembly department until January or February. Contrary to common accounting practice, the General Electronics, Inc., Accounting Policy Manual states that such parts are to be recorded as an expense when delivered. To avoid recording the expense, Mr. Richart asked that the order be canceled, but the purchasing department reported that the parts had already been delivered and the supplier would not accept returns. Because the bill had not yet been paid, Mr. Richart asked the accounting department to correct the clerk’s mistake by delaying recognition of the delivery until the bill is paid in January.
1. Are Mr. Richart’s actions ethical? Explain why they are or are not ethical.
2. Do the general management philosophy and accounting policies at General Electronics encourage or discourage ethical behavior? Explain.