Project Earnings
Project Earnings Manipulation: An Ethics Case Based on Agency Theory
ABSTRACT: The impact of accounting information on ethical behavior has been extensively documented. Additionally, agency theory is a widely accepted behavioral perspective. Despite this, there is an absence of instructional material in the accounting education literature that ties ethical issues to an agency-theory context. The primary objective of this case is to highlight control system ethical issues using an agency-theory context. Students explore their own reactions to a prohibited but unmonitored cost allocation action. Thus, this case is positioned to fill this void in any accounting course that covers agency theory or management control systems.
S
ue Davies, a single mother with two school-aged children, was a project manager in Pure Marine’s Membrane and Related Equipment Group. It was a Friday afternoon late in September with Indian Summer in full force. She sat in her office considering how to account for the last $2 million of a $5 million Technical Improvement R&D expenditure that had just arrived in her internal mail for cost allocation. She had originally approved the expenditure over a year ago for Project K(3), but she was now unsure whether to charge the last $2 million to the nearly completed K(3), or to two recently started projects. Since its founding in 1948, Pure Marine had maintained industry leadership in the large-scale provision of clean water. For almost 50 years, the
DECISION
company had developed membranebased and other advanced technology systems for municipal and industrial markets. The technology is used for desalination and wastewater treatment as well as the production of highly pure water. These markets currently account for about 52 percent of Pure Marine’s revenues and 37 percent of total earnings. The other two major business areas include operation or ownership/operation of water treatment facilities for Jeffrey is an Associate Professor at
ABSTRACT: The impact of accounting information on ethical behavior has been extensively documented. Additionally, agency theory is a widely accepted behavioral perspective. Despite this, there is an absence of instructional material in the accounting education literature that ties ethical issues to an agency-theory context. The primary objective of this case is to highlight control system ethical issues using an agency-theory context. Students explore their own reactions to a prohibited but unmonitored cost allocation action. Thus, this case is positioned to fill this void in any accounting course that covers agency theory or management control systems.
S
ue Davies, a single mother with two school-aged children, was a project manager in Pure Marine’s Membrane and Related Equipment Group. It was a Friday afternoon late in September with Indian Summer in full force. She sat in her office considering how to account for the last $2 million of a $5 million Technical Improvement R&D expenditure that had just arrived in her internal mail for cost allocation. She had originally approved the expenditure over a year ago for Project K(3), but she was now unsure whether to charge the last $2 million to the nearly completed K(3), or to two recently started projects. Since its founding in 1948, Pure Marine had maintained industry leadership in the large-scale provision of clean water. For almost 50 years, the
DECISION
company had developed membranebased and other advanced technology systems for municipal and industrial markets. The technology is used for desalination and wastewater treatment as well as the production of highly pure water. These markets currently account for about 52 percent of Pure Marine’s revenues and 37 percent of total earnings. The other two major business areas include operation or ownership/operation of water treatment facilities for Jeffrey is an Associate Professor at