“It’s impossible! There is no justification for ignoring these entries.” These are the words spoken by Jackie Bauman at a meeting with the CFO of the company, Glen Donner.
Cumberland Lumber is a regional company and privately owned by members of the Simon family. Jackie is the chief internal auditor at Cumberland Lumber, a large lumber liquidator in the Cumberland Valley of Pennsylvania. While she does not report directly to Glen Donner, the culture of the company is such that Glen makes the final call on accounting issues because he has CEO Larry Simon’s ear.
The issue being discussed between Jackie and Glen is whether a variety of year-end accruals should be recorded. These include:
1.Accrual for future vacation pay of $50,000.
2.Allowance for repairs and maintenance, $70,000.
3.Reserve for inventory obsolescence, $80,000.
The total amount of $200,000 is 25 percent of earnings for the year.
Jackie provides the following reasons for recording these amounts:
1.The accrual for vacation pay is based on a commitment to employees to pay these amounts so long as they use their vacation hours by the end of the following calendar year.
2.The allowance for repairs is an annual adjustment to reserve for future repair costs on machinery and equipment.
3.The reserve for inventory obsolescence is a new item but reflects the failure of the company to get rid of certain lumber products that have been on the books for almost two years.
Glen counters Jackie’s explanation as follows.
1.Employees may not take vacation time next year because the employment market is tight and there is an economic recession, so they may not want to leave, even for a week or two, for fear of losing their job.
2.Repairs and maintenance are discretionary expenditures, and there is no reason to accrue for them.
3.The “obsolete” inventory will be sold to a buyer who is willing to take it off the company’s hands so Glen suggests waiting until it is sold at that time for scrap value.
As a CPA, Jackie feels comfortable with her knowledge of the accounting rules. She tries to discuss her differences with Glen using this perspective. She also explains her ethical obligations. Glen simply tells Jackie to make the entries if she wants to keep her job.
Questions
1.Discuss the appropriateness of making the accrual entries based on the perspectives of Jackie and Glen. What do you believe to be the intent of Glen in this matter? Explain.
2.Characterize the leadership style of Glen and the culture of the company.
3.How does professional identity influence what Jackie might do in this case?
4.What would be most important to you in deciding what to do in this case if you were in Jackie’s position? What would you do and why? Be sure to consider the culture of the company and leadership style in crafting a response.
Review the following ethical rules from Chapter 3 in Exhibit 3.13.
Exhibit 3.13
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Ethical Responsibilities of CPAs to Avoid Subordination of Judgment
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