Question

Kara Williams is the new controller for Colors, a designer and manufacturer of sportswear. Shortly before the December 31 fiscal year-end, Lashea Lucas (the company president) asks Williams how things look for the year-end numbers. Lucas is not happy to learn that earnings growth may be below 10% for the first time in the company's five-year history. Lucas explains that financial analysts have again predicted a 12% earnings growth for the company and that she does not intend to disappoint them. She suggests that Williams talk to the assistant controller, who can explain how the previous controller dealt with this situation. The assistant controller suggests the following strategies:

a. Postpone planned advertising expenditures from December to January.
b. Do not record sales returns and allowances on the basis that they are individually immaterial.
c. Persuade retail customers to accelerate January orders to December.
d. Reduce the allowance for bad debts (and bad debts expense).
e. Colors ships finished goods to public warehouses across the country for temporary storage until it receives firm orders from customers. As Colors receives orders, it directs the warehouse to ship the goods to nearby customers. The assistant controller suggests recording goods sent to the public warehouses as sales.
Requirement
Which of these suggested strategies are inconsistent with IMA standards? What should Williams do if Lucas insists that she follow all of these suggestions?

Answer 1

1. Suggestions that are inconsistent with IMA standards are:

a. Does not violate IMA standards.

b. Is inconsistent with IMA standards.

c. Does not violate IMA standards.

d. Is not clear whether it would violate IMA standards.

e. Is inconsistent with IMA standards.

2. This is what Kara Williams should do if Lucas insists that she follow all of the suggestions:

Kara Williams should resist the attempt to implement b and e and should gather more information about d. If Lucas ignores Williams, then Williams should consider if she wants to continue working for a company that engages in unethical behavior.

Step-by-step explanation:

The Institute of Management Accountants (IMA) has ethical standards that should be followed by its members. These standards or principles include professional competence, integrity, credibility, and confidentiality. The most relevant principles, in this situation, are integrity and credibility. Integrity requires that members must not engage in activities that will expose the profession to public ridicule or unethical practices. Credibility requires fair and objective presentation and communication of financial information to stakeholders.