Prating should not collude with Kapp to give misleading information about the overall variance of the company because it is unethical. Disregard for standard or internal ethics in any area of business management, including accounting compromises organizational values; and that may limit the implementation of organizational strategies (Garrison, Noreen, & Brewer, 2018). Accordingly leaving out details integral to the cost control report to give the supervisors a different impression from the company's real financial state could lead to making wrong decisions. Since these are managerial costs, the leadership of Prudhom Enterprises, Inc, relies on them to make both short term and long term decisions that determine operations. Unlike financial accounting which reports on past performance without implications for organizational goals, the report focuses on the future of the business. Therefore, as a managerial accountant, Prating's choices are important for both the internal and external stakeholders.
The best action for Prating to take in the situation is to convince Kapp to allow the department to provide the right information by reminding him of the negatives implications that giving a wrong report would have on both of them and their organization. Apparently, the company could take punitive action against him and the manager if he distorts the data maliciously. If he fails to persuade the manager, Prating could consider discussing the matter with higher authorities to avoid being part of the unethical scheme. Besides, since he does not approve expenditures in the department, he risks nothing by releasing the appropriate budget detail. On the other hand, if he chooses to protect his boss, he puts his interests in the company at stake.
An exploration of the cost report indicates that the Colorado Springs business had not performed so poorly as to warrant manipulation of financial statements. Although the firm had done worse than in the previous budget, the overall positive variance still exceeded the outcome of all the negative differences put together. From its flexible budget, the company had saved $2150 despite overspending on engineering infrastructure. Besides, the over-expenditure that bothers Kapp was an essential infrastructural installation.
Prating is not obliged to take the wrong direction from Kapp, even though he is his supervisor. As the direct manager of the manufacturing plant at Colorado Springs, the company has entrusted him with authority to make decisions that are in the interest of the business, and not individual supervisors. According to the Institute of Management Accountants (IMA), the people charged with the duty of managing managerial costs must act in a way that demonstrates credibility, integrity, and competence (Martini, 2013).
An accountant is credible if they can exercise objectivity and fairness in disseminating cost information to all users. It, therefore, means that Prating would fall short of the requirement for credibility if he provides subjective information to the rest of the company leadership. Secondly, IMA considers all managerial accountants who engage in any unethical behavior to be lacking integrity. Competence in this sense has to do with adherence to professional standards of work. The suggestions that Kapp gave Prating seem to violate all these ideals. Besides the three values, there is the confidentiality requirement, which states that managerial accountants can only reveal information allowed by their supervisors. Arguably, Kapp could use this argument to justify his position regarding the disclosure of unfavorable variance information. However, in this matter, Kapp is not the final authority because the knowledge that he wishes to hide is in the interest of his seniors. Therefore, to remain professional, Prating must balance all the four ethical principles to reach a right decision.
Nonetheless, the decision that Prating takes would depend on his ideas and discretion (Martini, 2013). He could as well choose the easy way, which is to take Kapp's direction and delay the billings to save his supervisor from accountability. This decision is convenient because it is unlikely that Sanchez would decline to withhold the payment requests for a few days if Prating asked them. At the same time, it would still be possible to include the fee that brings about the overall negative variance in the next financial budget and reconcile the cost information to account for it, so higher management would not know about it. They could do that by developing a way to leverage positive variances and minimize the negative variance. If they saved the finances spent on wasted supplies and power in the next budget period, they could save enough money to clear the bill without raising suspicion in the top leadership (Garrison, Noreen, & Brewer, 2018). However, due to the unpredictability of contingent expenses, it is difficult to guarantee such outcomes in the next budget. Hence, carrying the payment forward could as well be detrimental to the variance of the next budget.
However, even if the plan succeeds, the company could unearth the foul play through an external audit. In case the deliberate unethical decision is known by the top management, some action may be taken against the two managers. But, whatever the company leadership may decide, the punishment cannot include legal action because unethical conduct does not necessarily constitute a violation of the law (Martini, 2013). Prating and Kapp must be familiar with this reasoning because businesses have advanced it for convenience in their approach to stakeholder relations. It could also work with internal decision-making processes. In reality, when handling accounting records and reports, finance managers often push the ethical thresholds beyond the limit. Besides, companies also take actions against managers who continually fail in revenue management. That is one reason the two managers would be interested in falsely creating the impression that they did well financially. The fact that there are consequences for each of the two choices puts the manager in a dilemma. Therefore, there are high chances that Prating would take the latter action.
In conclusion, both cost reporting and accounting are essential functions in an organization because financial information is used to make critical decisions in business. Failure to adhere to professional ethics in accounting can lower the quality of information that comes from accounting procedures. Moreover, the law affords organizations greater freedom in compilation and disclosure of information for cost reporting than for financial accounting. Therefore, the management accountants are left to govern themselves through professional ethics. Organizations like IMA have identified ethical values for management accountants. In the case of Prudhom Enterprises, it would be in the best interest of Prating and the company to include all the accurate cost information despite the severe financial variances that were recorded. Withholding information would not only be unethical in managerial accounting but would also hamper the strategic planning and organizational goals. However, the managers risk facing undesirable consequences regardless of the actions they choose. The choice of whether to be ethical or not depends on the manager's discretion.
Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial accounting. New York, NY: McGraw-Hill Education.
Martini, A. (2013). Financial and managerial accounting (moduli 2 e 3) 2013. Milano: McGraw-Hill Education.
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