Ethical Issues in Budgeting: Accounting Case Study

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Accounting: Ethical Issues in Budgeting

What should an employee do when he or she discovers that there is an error in a projection?

Accounting professionals have a duty to observe high standards of conduct and integrity in order to uphold the reputation of the accounting profession. For instance, if an error occurs in sales projections, the accountant has a duty to correct the error immediately and inform the head of the department or manager of the company. Sales projections are crucial to a company's budget because they give an idea of the amount of revenue the company intends to generate in future. Since they help determine the health of the company, majority of the decisions the company makes will based on the projected figures. If an accountant chooses to conceal errors in the projections, therefore, wrong decisions will be made and the overall performance of the company will be affected tremendously. Moreover, the accountant has a moral obligation to adhere to professionalism and act in accordance of the code of ethics of his profession.

Sometimes, erroneous projections may not affect other aspects of the operation, such as employment. Nevertheless, the accountant still needs to report the errors to the concerned supervisors. This will allow for the corrections, however minimal, to be made, and will ensure that the budget reflects the true financial position of the company. If projections are transparent, clear, and accurate, they will provide the information and tools necessary to determine efficient and effective ways of allocating resources in ways that are consistent with company values. Furthermore, ethical codes of conduct that govern the accounting profession require accountants to refrain from any information they believe contains false or misleading statements, since it results to misleading by omission.

Legal and ethical issues surrounding the case

Daniel conducted an analysis and came up with projected sales of 250,000 units of products, which represents a 25% increase over the sales of 2010. He later realized that he had made a mistake, and that he had erroneously projected twice the level of sales than would likely occur. Pete acted on these numbers and hired additional workers to produce the product. Daniel is undecided on whether to report the issue to Pete or wait to see whether the demand will increase as projected or not. Walker advises Daniel to protect his interests first.

It is against the law to provide financial information that does not present a true and fair view of the financial position of the business. More specifically, Daniel should comply with applicable rules, laws, regulations, and corporate governance policies.

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Daniel has a moral obligation to consider the effects his actions will have on other stakeholders. The code of ethics also requires him to refrain from conflicts of interest that will compromise his professional judgment, and to uphold integrity, professional competence and due care. It would, therefore, be ethically wrong for Daniel to conceal the error and to follow Walker's advice and put his interests before those of others.

Question 2: Identify the stakeholders potentially affected by what Daniel decides to do

Various stakeholders will be affected by what Daniel decides to do. For instance, Pete has already acted on the numbers and hired extra workers, which is an extra cost to the business. Should Daniel choose to conceal the error in sales projections and the sales numbers turn out wrong, Pete will be held accountable for the added cost. Furthermore, all the additional workers will have to be fired. Therefore, Daniel has a moral duty to protect the workers' jobs and Pete's competency. If the wrong sales projections are used, demand may turn out less than expected and the revenues will not be sufficient to cover the costs. Thus, Lynchberg Manufacturing will also be disadvantaged because it is bound to incur losses in that financial period. Since, the company requires every accountant to maintain objectivity and integrity, it will be wrong for Daniel to misrepresent the facts.

Other third parties that will be affected by Daniel's decision include the shareholders, investors, consumers, and suppliers. Daniel's projections might influence investors' decisions because they give the impression that the business will get more revenues in future. Investors will then choose to invest more funds in the company; suppliers may offer more products on credit; and the shareholders will expect more returns at the end of the financial year. If the demand fails to increase beyond the projected levels, the business will then incur losses that will also translate to losses to all these stakeholders.

In accordance with deontological ethics, Daniel's actions should adhere to the rules, regulations and guidelines that govern the accountancy profession. The theory of consequentialism also holds that the consequences of an action should be used to judge its rightness or wrongness. In this regard, Daniel has a moral obligation to consider all the negative consequences each stakeholder is bound to have if he chooses to conceal the error.

Question 3: Assume Daniels is both a CPA and holds the Certified Management Accountant (CMA) certification granted by the IMA. Use the ethical standards of these two organizations to identify what Daniels….....

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