Conflict Interest Case
Subject: Chief employee bonus: Conflict Interest. To: Ethics for Accountant From: Kyungwon Kwak Date: 03/07/2011 1. Ethics Case-Chief employee bonus
The WGN Company has a bonus arrangement, which grants the financial vice president and other executives a $15,000 bonus if the net income exceeds the previous year's by $1,000,000. Noting that the current financial statements report an increase of $950,000 in the net income, Vice President Jack Brickhouse asks Louise Boudreau, the controller, to reduce the estimate of warranty expense to $60,000. The present estimate of warranty expense is $500,000 and is known by both Brickhouse and Boudreau to be a fairly "soft" amount.
Possible raising questions: | · | Should Boudreau lower her estimate? | | · | What ethical issue is at stake? Would anyone be harmed by the change in estimate? | | · | Is Brickhouse acting ethically? | | | |
My Possible answers: | | * | * No, Louise Boudreau, the controller should not manipulate net income in view of any compensation plan the company may have. | | | * The economic interests of the management and the potential for their bonus plans conflict with the stockholder's interest that financial statements clearly and accurately reflect net income. If the warranty expense is reduced and the original estimate turns out to be accurate, the stockholders are harmed because the company pays a bonus the managers did not earn. | | · | * No, Brickhouse is acting unethically. His action serves only his self-interest and has no clear basis in proper accounting procedures. 1. Ways to mitigate conflicts of interestsRemovalThe best way to handle conflicts of interests is to avoid them entirely. For example, someone elected to political office might sell all corporate stocks that he/she owns before taking office, and resign from all corporate boards. Or that person could move his/her corporate stocks to a special trust, which
The WGN Company has a bonus arrangement, which grants the financial vice president and other executives a $15,000 bonus if the net income exceeds the previous year's by $1,000,000. Noting that the current financial statements report an increase of $950,000 in the net income, Vice President Jack Brickhouse asks Louise Boudreau, the controller, to reduce the estimate of warranty expense to $60,000. The present estimate of warranty expense is $500,000 and is known by both Brickhouse and Boudreau to be a fairly "soft" amount.
Possible raising questions: | · | Should Boudreau lower her estimate? | | · | What ethical issue is at stake? Would anyone be harmed by the change in estimate? | | · | Is Brickhouse acting ethically? | | | |
My Possible answers: | | * | * No, Louise Boudreau, the controller should not manipulate net income in view of any compensation plan the company may have. | | | * The economic interests of the management and the potential for their bonus plans conflict with the stockholder's interest that financial statements clearly and accurately reflect net income. If the warranty expense is reduced and the original estimate turns out to be accurate, the stockholders are harmed because the company pays a bonus the managers did not earn. | | · | * No, Brickhouse is acting unethically. His action serves only his self-interest and has no clear basis in proper accounting procedures. 1. Ways to mitigate conflicts of interestsRemovalThe best way to handle conflicts of interests is to avoid them entirely. For example, someone elected to political office might sell all corporate stocks that he/she owns before taking office, and resign from all corporate boards. Or that person could move his/her corporate stocks to a special trust, which
References: http://higheredbcs.wiley.com/legacy/college/kieso/0470374942/gate/Ethics_in_Accounting/ethics_in_accounting.html#Solutions |