Top Management of General Electronics - Case Study Example

Number: Paper: Introduction The case study of General Electronics (GE) gives emphasis on the ethical behavior practiced in the company. It aims at understanding whether there is breach of ethical norms related to accounting policies followed by the company. Top management of GE is well known for managing revenue and profit, which encourages them to reach the desired growth. The Chief Executive Officer (CEO) predicts an amount at the beginning of the year. This amount is regarded as the target profit for the company. After setting the goal for her employees, the CEO does not interfere in the selling, marketing or operational process; instead she is available for giving advice if required. She has given full authority to the Vice Presidents of respective departments in the company to do anything to achieve the profit at the end of the year. Nevertheless, in November, Stan Richart, Vice President of Cellular Telephone Division, identified that it would be difficult for its division to meet the target profit amount at the end of that particular year. Thus, he devised different strategies to delay expenditures of that particular year to next year’s account. He decided to consider discretionary expenditure during that period of time to be delayed to the beginning of next year. However, during December 30, he was annoyed to recognize the fact that a warehouse clerk has ordered raw materials of $ 3, 50,000 in that month. Mr. Richart inspected that this materials were actually not needed by the assembly department till February. He was worried about the situation as they could not reach the target profit set by the company and additionally the division has to encounter huge expenditure, which was not required during that particular year. In order to control the situation, The Vice President he ordered to cancel the delivery of the raw material; however, the material was already delivered. Thus, he planned to delay recognition of delivery of materials till its payment in January. According to the Accounting Policy Manual status manual followed by GE, the expense of such materials are to be recovered which have already been delivered. Thus, Vice President avoided recording of this expenditure in this particular year by delaying the recognition of the delivery. The case analyses whether the action of Mr. Richarts is ethical for the operation of the company. It also lays emphasis the fact whether the philosophy of general management and accounting policies followed by GE encourage ethical behaviors. After analyzing the case study, it is observed that Mr. Richart has undertaken unethical means in meeting the goals set by the CEO of the company. Moreover, it can be concluded that the company’s general management philosophy and accounting policy encourage ethical behaviors. Analysis Whether Mr. Richarts action is ethical After recognizing the fact that the Cellular Telephone Division of GE, has not meet the annual targeted profit, Mr. Richart decided to delay the recognition of materials delivered in order to hide the mistake of warehouse clerk and meet the target profit set by the CEO. In order to delay the delivery of raw materials the following consequences were inevitable: Firstly, Mr. Richart directed his staffs to delay the discretionary expenditures until the next years so that the profit amount of the present was not affected. However, the delay of discretionary expenditure did not affect the operation of the company as the materials were required in February of the next year. Thus, the decision to delay the expenditure was relevant and good in this context. The company could keep cash and cash equivalents for a longer period of time in the present year by delaying the expenditure to next year. Thus, it can be stated that there is nothing unethical about the decision of delaying the payment of the delivery of the materials. Secondly, being a controller of the Cellular Telephone Department it is his duty to control the cash balance and profit. Additionally, it is his responsibility to rectify the mistakes done by his subordinates in order to maintain uninterrupted operation in the company. Thus, there is nothing unethical to order for cancelling delivery of the materials, which are not required by the assembly department during that particular year (Hope, 2003; Kaplan, 1992; Persson & Tabellini, 2002; Kamensky, 2013). Thirdly, Mr. Richart asked the accounting department of GE to delay the recognition of the delivery until the next year. This particular action is unethical with respect to the company accounting policy. The accounting policy of the company stated that the expenses should be recorded that are delivered on time and in the year of delivery. However, Mr. Richart ordered the accounting department to do something that is against the policy of the company. This action is unethical according to the policies adopted by GE. It affected the integrity of the accounting system of the company. Integrity forms an integrals part of the management accounting system, as without trusting an accounting system it is difficult to run an established business and obtain funds from investors and creditors (IMA, 2014; Hearst Newspapers, LLC, 2014). The practitioners of financial management and managerial accounting have the responsibility to take into account the following guidelines. They avoid apparent or actual conflict of interest and try to rectify the collusion arise between different parties that are related to the accounting system. They are ordered not to engage in any activity that will harm their capability to do their job. They are not allowed to take any favor or hospitality or gift, which will influence their action at present and in future (Hope, 2003; Kaplan, 1992; Persson & Tabellini, 2002; Kamensky, 2013). The practitioners are refrained from engaging into any activity that is against the objective of the company. They have to recognize and deliver the professional limitations or constraints, which will preclude any successful performance or responsible judgment of the activities. They are liable to communicate information (both favorable and unfavorable) in order to take professional opinion to manage the situation tactfully. They should not enter into any sort of contract that will obstruct them for doing their duty responsibly and give disrespect to their profession (Kaplan, 1992; IMA, 2014; Hearst Newspapers, LLC, 2014). The above mentioned responsibilities are also directed at the accounting professionals of GE. By agreeing to delay the recognition of the delivered materials to the next year, they have breached the norms and policies of the company. However, Mr. Richart can defend his behavior by pointing at the flawed accounting policy of the company pertaining to purchase of raw material. According to the general accounting principles, purchase of raw materials are not recorded as expense, but in accordance with the accounting principles of GE such purchases are regarded as expenses. Thus, in this context, it can be stated that decision of Mr. Richart is quite critical for evaluation as the company’s accounting policy with respect to raw material is flawed. It will be injustice to blame Mr. Richart for the situation too as his action was justified. The top management of GE believes in manage-by-the-number approach that does not foster ethical behavior. In such an approach, the managers are told to do anything to hit the targeted profit at the end of the year. There is no excuse pressure from the top management, which often forces the managers to take unethical steps. In such a context, it can be stated that Mr. Richart has taken the decision under pressure of the company policies, which are flawed (Persson & Tabellini, 2002; Hope, 2003; Kaplan, 1992; Kamensky, 2013). General management philosophy and accounting policies at General Electronics In GE the general management philosophy as well as accounting policies is both questionable as they are reviewed to be incorrect and does not comply with general principles followed by industries. However, there are companies like GE who devote their time and effort on managing their business by numbers. This management by numbers indicates the fact the companies aims at increasing their sales and profit based on the targeted amounts that are predicted at the beginning of a certain period of time. According to Peter Drucker “You can’t manage what you don’t measure” (Kamensky, 2013); however, Christopher Hood has also raised a question against the statement whether management by number actually improves performance of a company. Dr. Hood had stated that the numbers are used for operational and functional culture of the companies. However, there are three basic forms of performance numbers such as ranking, targets and intelligence. Each of the numbers is used by different companies for maintaining their sales and profit. The target approach is common among companies like GE where number is set at minimum threshold for performance such as reduction of carbon dioxide targets. However, many authors have argued that accomplishment of the targets renders powerful incentives for improving the performance of the company. Regardless of its positive results, there are negative implications too. Targets unintentionally affect performance of the company by developing the threshold, ratchet effect and output distortion (Wheelen & Hunger, 2011; Kamensky, 2013; Hope, 2003; Kaplan, 1992; Persson & Tabellini, 2002; Kamensky, 2013). The ranking approach highlights that the numbers are used for tallying performance of different units like work groups, individuals, cities, organizations or countries. They have the capability to attract the attention of higher level authorities and media. Authors have illustrated the fact that this approach motivates the performers to perform effectively. This process has the ability to overcome the threshold and ratchet effects of employing the targets.  However, the opponents have noted that there exists strong output distortion effect in this approach (Wise, 2013). The intelligence approach highlights employment of numbers for understanding the underlying information for management intervention, policy development and choice of the users rather than emphasizing on the set targets or ranks.  This approach is accepted to be the best one from all as it has very good application in both private and public sector. This approach has been used increasingly in the recent and this has allowed greater transparency in the work culture (Hope, 2003; Kaplan, 1992; Persson & Tabellini, 2002; Kamensky, 2013). Among the above mentioned approaches, GE concentrates on applying target approach as their business philosophy. According to Dr. Hood, the target approach has few negative impacts, which may lead to severe consequences in the company. Target approach does not give emphasis on the quality of business it only concentrates on quantity of sales or profit that it had earned during a particular period of time. Thus, it can be deduced that the top management of GE is not concerned about the methods that are used to draw the profit in fact they focus on growth or profit figure at the end of the year (Wheelen & Hunger, 2011). They do not want to know how the mangers will perform their jib instead they are interested in meeting the set target. For this reason, when the targets are not meet the managers are forced to take unethical means to satisfy the top management. The same situation was encountered by Mr. Richart as his division failed to reach the desired target of the company. Hence, for the particular situation in GE, Mr. Richart cannot be blamed totally for his unethical behavior; rather he was forced to take such a decision. Nevertheless, it is worth mentioning that the general management philosophy of GE encourages unethical behavior in order to meet the targets that are set at the beginning of the year by the top management (John Wiley & Sons, Inc., 2006; Hope, 2003; Kaplan, 1992; Persson & Tabellini, 2002; Kamensky, 2013). The practitioners of financial management and management accounting is obliged to follow certain rule and regulations to serve the private and public sector so as to maintain highest standard pertaining to ethical conduct. For recognizing the obligations, Institution of Management Accountants (IMA) has formulated the following ethical standards for the practitioners (John Wiley & Sons, Inc., 2006; Hope, 2003; Kaplan, 1992; Persson & Tabellini, 2002; Kamensky, 2013; IMA, 2014; Hearst Newspapers, LLC, 2014)). The practitioners of management accounting have the responsibility to preserve a particular level of professional competence by developing appropriate skills and knowledge. They are bound to perform professional duties that align with the regulations, laws and technical standards. They prepare to complete reports and recommend after successful completion of relevant information. The management accountants have the responsibility to maintain confidentiality and do not reveal financial and non-financial information about the company. The accountants are refrained from disclosing information those are coincidental and important for the company. The managers should inform their subordinates regarding the confidential information that are acquired during the course of work. They have the responsibility to monitor the activities for assuring maintenance of the confidentiality of the information. The information is also protected from illegal or third party use (John Wiley & Sons, Inc., 2006; (IMA, 2014; Hearst Newspapers, LLC, 2014). The practitioners should communicate financial as well as non-financial information objectively and fairly. They have the responsibility to disclose relevant information fully in the financial statements so that the stakeholders are benefitted from them. Those are capable of influencing the users as it is provided in the comments, reports and recommendations that are presented by the practitioners (Taicu, 2010). Among the above mentioned practices, the Vice President failed to maintain integrity of the company as he told the accounts department to recognize the expenditure amount in the next year’ statement so that the profit of that particular year is not affected (IMA, 2014; Hearst Newspapers, LLC, 2014). Conclusion Mr. Richart works in such a company where unethical practices are encouraged through general management philosophy and accounting policies. This statement is proved after analyzing the case of GE. The case underlined the fact that GE followed such policies, which are not relevant for the industry as it is unethical. The general management philosophy of GE is based on management by the numbers approach. This approach is noticed to have negative impact on the performance and quality of the company. The managers of the company are forced to undertake unethical means to meet their target. The Vice President of GE was forced to delay the recognition of expenditure pertaining to the purchase of raw materials, which are already delivered. The company could not extend the payment of raw materials as the suppliers did not to accept the offer. The Mr. Richart decided to realize the amount in the balance sheet of the next years so that the income of the present year is not affected. Though there is huge flaw in the accounting policies of the company, Mr. Richart breached the general accounting policy, thus it added to the unethical means that are adopted by the company. Apart from this, Mr. Richart also requested the accounting department to recognize the payment in the next years’ financial statements. In this way, the management accountant practitioners of GE had attempted to affect the integrity of the company. Hence, it can be concluded that Mr. Richart has undertaken unethical means in meeting the goals set by the CEO of the company. Additionally, it can also be stated that the company’s general management philosophy and accounting policy encourage ethical behaviors (Persson & Tabellini, 2002; Hope, 2003; Kaplan, 1992; Kamensky, 2013). Reference Hearst Newspapers, LLC. (2014). About Ethics in Managerial Accounting. Retrieved from http://smallbusiness.chron.com/ethics-managerial-accounting-3737.html Hope, O. K. (2003). Accounting policy disclosures and analysts forecasts. Contemporary Accounting Research, 20(2), 295-321. IMA. (2014). Code of Ethics. Retrieved from http://www.assessorsinstitute.ca/home.cfm?id=31#codeofethics John Wiley & Sons, Inc. (2006). Ethics In Accounting. 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