Case studies in management and organizational practice

Ethics Case

a) There are a number of different stakeholders in this case. The shareholders are one of the stakeholders, since their return on investment is dependent on the actions of the company's management. The employees of the company are also stakeholders. Securities regulators are also stakeholders. The controller and the president are the most important of the internal stakeholders, though all employees are indirect stakeholders. If there is a pension plan at the company that holds company stock, then that plan is a shareholder and therefore also a stakeholder.

From the controller's perspective, professional ethical standards apply. The controller is bound by professional ethics as well as the company's code of ethics and his or her personal ethical standards as well. Securities regulators also have an impact on the ethical standards to which the controller must adhere in this situation.

b) The president's request does present an ethical dilemma for the controller. The allowance for doubtful credit is intended to be used to help make the financial statements more accurate by accounting for the fact that some of the accounts receivable will not be converted into revenue. The rate at which this allowance is recorded is based on the firm's need for accurate reflection of this default risk. The president's request that the rate be changed is not based on a change in the level of default risk that the firm faces on its accounts receivable. The request is based on the desire to manipulate earnings levels and manage the expectations of the shareholders.

Thus, the request is in bad faith. The controller could comply with the request, but in doing so would be complicit with an attempt to deceive the shareholders and other stakeholders. The controller's objectives in this situation are to accurately reflect the state of the business; the president's request runs directly counter to this objective.

c) The controller should not be concerned with Ruiz Co.'s growth rate. The duty of the controller is to record as accurately as possible the company's financial condition. Accuracy is the most important consideration for the controller. The firm's growth rate is the responsibility of other managers.

The controller's duty of care is owed to the shareholders, regulators and other parties who are affected by the accuracy level of the financial statements. The duty, however, is not to provide the shareholders with a level of growth or to manage their expectations. The duty of the controller is to accurately reflect the firm's financial state.