ACCT 340 Week 3 Group Discussion Board Forum 2 Example

Group Discussion Board Forum 2: Organizational Ethics and Corporate Governance

ACCT 340 Accounting Ethics, Group Discussion Board Forum 2

Thread by [Student Name]

The homebuilder, its people and the classmate are composites; the textbook, Scripture and the peer-reviewed sources cited are real.

A composite regional homebuilder runs about a dozen subdivisions at once and pays its project managers bonuses based on each job's gross margin. Last year three subdivisions ran over budget because of lumber prices and a drainage problem. Rather than report the overruns, project managers began charging lumber and framing labor from the troubled jobs to two profitable ones, about $1.3 million in all. Each job's reported margin stayed near its target, every manager received a bonus and the controller, who noticed the pattern, said nothing because the company's total costs were unchanged. In her view, no one was harmed.

Mintz and Morris (2019) argue that an organization's ethical culture, the shared values and practices that shape behavior, matters as much as its written rules, and that leaders set that culture through what they reward, tolerate and ignore. The homebuilder has a code of conduct that forbids misrepresenting financial information, but its bonus system rewards a single number, and its controller's silence tells everyone that the number matters more than how it is reached. The chapter's idea of tone at the top describes exactly this. Schwartz et al. (2005) argue that the board itself must model and enforce ethical standards, because employees read the behavior of those at the top as a guide to what is really expected.

The controller is wrong that no one is harmed. Job cost records are the basis for pricing future subdivisions, evaluating managers and, if the company uses percentage-of-completion accounting for any of its contracts, recognizing revenue. Shifting costs makes profitable jobs look less profitable and failing jobs look healthy, so the company will underprice the kind of project that lost money and may promote the managers who hid problems. Lenders reviewing job-level results are misled as well, and so are the homebuyers in the later phases of the troubled subdivisions, whose prices were set from cost records that understated what those homes really cost to build. The practice also teaches every new project manager that the way to succeed is to make the numbers fit, a lesson that will be much harder to unlearn than it was to learn. Moving costs between jobs leaves the total unchanged, but it falsifies every decision that depends on knowing which jobs made money.

Who will stop it? The research suggests that the most likely candidates are inside the company. Dyck et al. (2010) studied every reported fraud case at large U.S. companies from 1996 to 2004 and found that detection did not rely mainly on the standard governance actors, such as investors, the SEC and auditors. Instead, it took a village, including employees, the media and industry regulators, with employees among the most important, and they found that monetary incentives helped explain employee whistleblowing. At the homebuilder, the people who know about the shifted costs are the site superintendents, the purchasing clerk and the accounts payable staff who code the invoices.

Whether those employees speak up depends on culture. Kaptein (2011) surveyed working adults and found that the ethical culture of an organization shaped how employees responded to wrongdoing they observed: in stronger ethical cultures, employees were more likely to address the wrongdoer or report to management and less likely to stay silent or go straight to outside parties. At the homebuilder, the controller's silence signals that internal reporting is pointless. An accounts payable clerk who notices lumber invoices coded to the wrong job will reasonably conclude that management already knows and does not care.

Scripture describes this dynamic plainly: if a ruler listens to falsehood, all his officials will be wicked (English Standard Version Bible, 2001/2016, Proverbs 29:12). A leader who accepts false numbers, even quietly, teaches everyone below that false numbers are acceptable. A Christian view of leadership treats the leader as a steward responsible for the integrity of the whole organization, not merely for its results, and it calls leaders to welcome uncomfortable truth rather than reward its concealment.

The board could address the cause in three ways. First, it could tie project managers' bonuses partly to the accuracy of their job cost forecasts, so that reporting an overrun early is rewarded rather than punished. Second, it could require the controller to report significant cost reallocations to the audit committee, making silence a policy violation rather than a choice. Third, it could establish a reporting channel that goes outside the chain of command, and the chief executive could say publicly that the company wants to hear about problems early. Each change aims at the incentives and signals that let the practice spread. None of them requires catching anyone; together they make honest reporting the easier path for a project manager whose job has gone over budget.

Reply to Maya

Maya, your thread argued that an independent audit committee is the most important governance safeguard against financial misreporting, and the evidence supports you. Abbott et al. (2004) found that companies whose audit committees were fully independent and held four or more meetings annually were significantly less likely to restate their financial statements, and that having at least one member with financial expertise was also associated with fewer restatements. Those findings fit the chapter's argument that governance works through people who have both the independence and the knowledge to ask hard questions.

I would add one limit, drawn from my homebuilder example. An audit committee can only respond to what reaches it. The shifted job costs at the homebuilder would never appear in the information the committee normally reviews, because company-wide totals were unchanged. That is why the evidence on who detects fraud matters: committees depend on employees and controllers to bring problems to them. A strong committee should therefore spend time on the channels that feed it, asking how often the hotline is used, what happens to reports and whether managers who report problems are treated well. In your example of the software company, I would suggest that the committee meet privately with the internal audit director at every meeting, without management present, which gives the people closest to the numbers a protected way to raise concerns. Independence on paper helps, but the committee's real strength is the quality of what it is told, and that depends on whether people below believe the committee wants to hear bad news. Your software company's committee could test that belief directly by asking how many hotline reports reached it last year and what became of each one.

References

Abbott, L. J., Parker, S., & Peters, G. F. (2004). Audit committee characteristics and restatements. Auditing: A Journal of Practice & Theory, 23(1), 69-87. https://doi.org/10.2308/aud.2004.23.1.69

Dyck, A., Morse, A., & Zingales, L. (2010). Who blows the whistle on corporate fraud? The Journal of Finance, 65(6), 2213-2253. https://doi.org/10.1111/j.1540-6261.2010.01614.x

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Kaptein, M. (2011). From inaction to external whistleblowing: The influence of the ethical culture of organizations on employee responses to observed wrongdoing. Journal of Business Ethics, 98(3), 513-530. https://doi.org/10.1007/s10551-010-0591-1

Mintz, S. M., & Morris, R. E. (2019). Ethical obligations and decision making in accounting: Text and cases (5th ed.). McGraw-Hill Education.

Schwartz, M. S., Dunfee, T. W., & Kline, M. J. (2005). Tone at the top: An ethics code for directors? Journal of Business Ethics, 58(1-3), 79-100. https://doi.org/10.1007/s10551-005-1390-y