Tae Franklin is the sales manager of Darius Enterprises, a very profitable distributor of office furniture to local businesses. A recent economic downturn has created an extremely tight cash position, and the company has been hurt by the bankruptcy of two key customers.In late October, anticipating an economic recovery, Franklin began an extensive remodeling of the company's sales floor. Construction costs, decorating, and equipment purchases are projected to cost $250,000.Darius has a policy that individual expenditures in excess of $200,000 must be approved by the firm's board of directors. Franklin, unfortunately, missed the deadline to have the board consider this project at its regular September meeting. Not wanting to wait until the next meeting in December, he subdivided the

Question

project in two parts-construction and decorating ($190,000) and equipment purchases ($60,000)-neither of which needed board approval because of the dollar amounts involved.The project was recently completed and sales have begun to recover. Customers have raved about the new sales area, noting that it is far superior to those of Darius's competitors.Required:A. Would Franklin's approach of subdividing the project in two parts have any effect on the company's financial statements? Briefly explain.B. Briefly discuss whether Franklin behaved in an ethical manner.C. Which, if any, of the following standards of conduct would have applicability to Franklin's conduct: competence, confidentiality, integrity, or credibility? Briefly explain.

What will be an ideal response?

Answer 1

A. Although some extra processing is involved because of the "separate" projects, the same total costs will be incurred for the same assets. Thus, there is no impact on the financial statements, which serve to summarize financial activity.
B. Franklin behaved in an unethical manner. Even though business is recovering and customers seem more than satisfied with the new sales area, Franklin knowingly bypassed stated company policy. The project is being done in a single phase, and is comprised of construction, decorating, and equipment acquisition. This is really one project; yet his accounting treatment implies otherwise.
C. Two standards are relevant here. Integrity holds that managers refrain from engaging in any conduct that would prejudice the ethical performance of duties. Additionally, credibility recognizes that managers have a responsibility to communicate information fairly and objectively, and disclose all relevant information that could reasonably be expected to influence a user's understanding of the reports and data presented.