Advanced Management Accounting of Sears Automotive Centers - Case Study Example

Advanced Management Accounting Answer to Question Deceiving the s with a ploy is the basic cause of Sears’ problem that originated during the slump of auto industry in late 1980s and early 1990s. In order to beat the competition, the break repairing jobs were advertised at unbelievable low price. In order to cover up the ploy, Sears’ advertisements put customers on notice that break repairing jobs some time could be more complex and expensive. But that was ploy to attract the car owners to repair shop so that Sears Repair Centers might sell them high priced jobs like replacing of calipers, whether those were worn out or not, or sell break jobs for the second axle, and like that . The idea was to earn profits by attracting car owners to repair centers for break repairs and selling them high priced repairs. The result was that car owners actually turned up paying many times higher than the lower priced break repairing jobs. Bureau of Automotive Repair (BAR) of the California Department of Consumer Affairs (DCA) investigated the matter on basis of many complaints. In December 1991 Sears were issued letters by Senior Assistant Attorney General of California, and the problem originated. Basically the responsibility of the problem lied with the expansion program of Sears’ automotive centers that brought in car dealerships in its Car Repair Centers. These dealers made the undercar service of break repairing a tool to attract customers and selling them high priced repairs along with cheap break repairing. Answer to Question 2 List of allegations against Sears Auto Centers 1. Sears advertised break repairing job for $48 or for $59.99 to attract customers with an alert that ‘Every break/ alignment job is different because additional parts/ services are often needed at a substantial extra cost’. This was a ploy to cover additional repairing jobs created or originated at the workshop only. 2. Sear employees resorted to scare tactics to sell repairs. 3. In 34 out of 35 instances the undercover investigators were told that cars on examination found to be in need of additional costly repairing jobs, when factually only minor repairing was required for undercover cars. 4. The undercover cars were allowed to be taken away from Sears Repair Centers only after making the payment for additional costly repairs. 5. 75% of the Sears’ garages asked to make additional repairs on cars with defects created by maneuverings in garages. 6. Investigations of BAR revealed substantial problems at Sears Repairing Centers that went deep into management structure. Answer to Question 3 Defenses and counter arguments of Sears and strength of those arguments Legal defense is an ethical justification.(Bank MacDowell, page 64)i . ‘Counter arguments are responses to opening views.’(Writing Centers)ii Defenses put by Sears and its counter arguments with strength of those arguments are as under: 1. There were significant problems with the way the BAR had prepared its vehicles for the run and those problems could have led mechanics to make good faith misdiagnosis. Counter argument: Sears has full right to challenge the method of conducting investigation by BAR. At the same time, it appears that BAR took all precautions so that any misadventure of befooling the car owners comes to the fore. Accordingly this stand of Sears of methodology of BAR will stand no where when confronted in court of law. 2. Sears objected to Bar’s investigation methods as under: BAR took the position that no system or part of the car could be replaced till it failed. BAR took high volume old cars with significant repair problems, repaired them by replacing parts, and then disguised the deed by ‘aging’ replaced parts. All of BAR run vehicles needed break repairing jobs and so the question raised by BAR of replacement calipers is controversial in itself. Some industry members were of the view that replacement of additional parts with break repairing jobs was a necessity and this is a acceptable trade standard. Counter arguments: It is not true that defective parts of cars get changed only when those fail. In fact regular servicing of cars is meant to find out the defects in cars so that those could be replaced before any mis-happening. BAR took a natural course when old cars were used for investigation. How use of new cars would have revealed the tricks Sears’ repairing centers were playing with car owners? It is not necessary that all parts of car system should be changed while repairing the system. Accordingly Sear’s stand of controversial caliper issue will stand no where. It is very clear that calipers are attachments that may or may not get damaged with breaking system of the car. As calipers are not parts of breaking system, accordingly their replacement is not attached to the defects of breaking system. Answer to Question 4 Employees involved in this so called fraud have revealed a lot that establish the planned nature of the fraud. One of them, Jerry C. Waddy, even filed suit against Sears for firing him for failing to meet his quota of additional repairing. From regulators’ point of view Sears even violated maintenance agreement with customers on expensive appliances. In fact as per investigators Sears violated basic norms of business just to avoid competition during slump period in late 80s and early 90s. Though there is other side of the picture as well. Few Sears’s well wishers are blaming the State by portraying the entire happening as a fraud perpetrated by the Sears. They are of the view that these are normal business tactics. But that is not a fact. In a free economy such maneuverings on part a reputed firm has to be treated as a fraud. These are certainly unfair tactics to enhance earnings. Under these circumstances Sears’ CEO Brennan is advised to the following suggestions: Seek a joint investigation with Govt. agencies like BAR and redundancy of existing compensation scheme. Accept the outcome of joint investigation without further contesting the judgment on investigation. Assuming compensation is ordered for sufferers, asked for phased payment procedure or free repairing of their vehicles till compensations get settled. Answer to Question 5 The existing compensation scheme certainly needs modifications. Any business activity, legal or not, is not possible without employees and service advisors joining such activity. ‘Employees who commit fraud supposedly in their employer’s interest are usually motivated by a desire of personal gain.’(Michael J Corner, page 31)iii Accordingly the entire case needs a relook from the point of Sears. It is true that investigations conducted by BAR has many positive allegations pointing to the fraud. But another trial through a joint investigation will serve the purpose of natural justice. Sear’s cooperation in the endeavor is a necessity as the entire creditability of Sear’s is at stake. Sears has to rebuild the damaged creditability. References Read More