Question

(Disclosure of Estimates) Nancy Tercek, the financial vice president, and Margaret Lilly, the controller, of Romine Manufacturing Company are reviewing the financial ratios of the company for the years 2017 and 2018. The financial vice president notes that the profit margin on sales ratio has increased from 6% to 12%, a hefty gain for the 2-year period. Tercek is in the process of issuing a media release that emphasizes the efficiency of Romine Manufacturing in controlling cost. Margaret Lilly knows that the difference in ratios is due primarily to an earlier company decision to reduce the estimates of warranty and bad debt expense for 2018. The controller, not sure of her supervisor’s motives, hesitates to suggest to Tercek that the company’s improvement is unrelated to efficiency in controlling cost. To complicate matters, the media release is scheduled in a few days.

Instructions

1. What, if any, is the ethical dilemma in this situation?

Short answer

The Financial vice president is manipulating the company’s financial condition.

Step-by-step solution

Meaning of Ethical Dilemma

An ethical dilemma arises when two sets of human ideals are conflicting, both of which are desirable but cannot be fully realized. There is no such thing as a one-size-fits-all ethical solution; instead, many approaches address the balance of values in different ways for different people.

Explaining the ethical dilemma in the above situation

The controller points out that the financial vice president is misrepresenting the company's financial situation by implying that it had grown more efficient when, in reality, the better ratio was achieved by estimate manipulation. The controller, on the other hand, is hesitant since estimating does not follow strict, well-defined criteria.

The problem arises when Lilly is required to evaluate the benefits to the firm if its profit margin on sales looks to be substantially higher against the accountant's typical responsibility to disclose financial data properly (that is, in a manner that is consistent with the previous reporting).