Reference no: EM132637590

Ethics, budgetary pressure: management bonuses: manufacturer P931 Belco industries produces and distributes industrial chemicals. Belco's earnings increased sharply last year. L093 and bonuses were paid to the management staff for the ?rst time in several years. Bonuses are based in part 9.11 on the amount by which reported profit exceeds budgeted pro?t. Jlrn Kern. the finance director. was pleased with Beico's earnings and thought that the pressure to show financial results would ease. However, Ellen North. Beico‘s managing director. told Kern that she saw no reason why this year's bonuses should not be double those of last year. As a result. Kern felt great pressure to increase reported pro?t well above the budgeted pro?t. This would aSsure increased bonuses. Kern met with Bill Keller of Pristeel Ltd. which supplied most of the company's manufacturing supplies and small equipment. Kern and Keller have been close business contacts for many years. Kern asked Keller to invoice all Belco's purchases of perishable supplies as equipment. Kern told Keller that Eelco's managing director had imposed stringent budget constraints on operating costs but not on capital expenditures. Keller agreed to do as Kern had asked. Kern planned to capitalise the purchase of perishable supplies and include them with the equipment account on the balance sheet. This way, Kern could defer the full expense recognition for these items to later years. This would increase reported pro?ts, leading to increased bonuses. While analysing the financial statements for the second quarter of the current year. Gary Wood. Belco‘s accountant. noticed a large decrease in the cost of supplies compared with that of last year. Wood reviewed the supplies account and noticed that very few supplies had been purchased from Pristeel. a major source of supplies. However, there had been large purchases of equipment from Pristeei. Wood. who reports to Kern. immediately brought this to Kern's attention. Kern told Wood of North's high expectations and of the Elna"Element made with Eliil Keller of Pristeel. Wood told Kern that his action was an improper accounting treatment for the supplies porchased from Pristeei. Wood requested that he be allowed to correct the accounts and urged that the arrangement with Pristeel be discontinued. Kern refused the request and told Wood not to become involved. After clarifying the situation In a confidential discussion with an objective and quali?ed peer within Beico. Wood arranged to meet with North. the managing ""9"" At the meeting. Wood disclosed the arrangement Kern had made with Pristeel.

Questions:

Question 1: Explain why the use of alternative accounting methods to manipulate reported earnings is unethical.

Question 2: Is Gary Wood, Belco's accountant, correct in saying that the supplies purchased with Pristeel were accounted for improperly? Explain your answer.

Question 3: Discuss whether the actions of Gary Wood, Belco's accountant, were appropriate or inappropriate. In your answer refer to the code of ethical conduct discussed