Gutierrez Company, a public corporation, operates a regional chain of large drug stores. Each pharmacy is operated by a general manager and a controller. The general manager is responsible for the daily operations of the store, while the controller is responsible for budgeting and other financial tasks. General Manager Tracie Kappan has been with Gutierrez Company for several years. Employee turnover is high at Gutierrez Company, as it is in the retail industry in general. Kappan has just hired a new controller, Min Yang.
Yang was asked to prepare the master budget. Each retail location prepares its master budget once a year and then submits it to company headquarters for approval. Once approved by the parent company, the master budget is used to evaluate the performance of the store. These performance reviews directly affect managers’ bonuses and whether additional company funds are invested in that location.
When Yang was almost finished preparing the budget, Kappan instructed him to increase the budgeted amounts for labor and supplies by 20%. When asked why, Kappan replied that this budget cushion gives store management flexibility to manage the store. For example, because operating funds and capital improvement funds are strictly controlled by the company headquarters, any additional money budgeted for labor and supplies may be used to replace store furnishings or to pay bonuses to help retain good employees. She explains that the possibility of obtaining additional funds from the company’s headquarters is not good; this “cushion” is often the only opportunity to replace store decor or pay bonuses to key employees. Kappan also needs additional funds from time to time to make “under the table” payments to employees as incentives to work overtime or to keep them from leaving for a better paying job.
Yang feels conflicted. She is eager to please Kappan and wonders what she should do herself. do in this situation.
Requirements
1. Using the IMA Statement of Professional Ethical Practice as an ethical framework, she answers the following questions: a. What are the ethical issues in this situation? b. What are Yang’s responsibilities as a management accountant?
2. Would her answer differ if the Gutierrez Company was owned by an individual rather than a public company? Why or why not?
3. Would anyone be hurt if the slack was built into the budget? Why or why not?
4. Discuss the specific steps Yang should take in this situation. See the IMA
Statement of ethical professional practice in your response