That we do not find out about cost overruns until the project is completed creates a climate where managers are motivated to overlook past transgressions yet are powerless to address future ones. Lastly, I would tie performance-based bonuses either to non-financial measures or to ones based on financial accounting, subject to GAAP and other defined rules and procedures. In general, financial incentives are only necessary when there are competing incentives (Jensen, 1994); that is not the case here. 1. Sue faces multiple challenges. She has cost overruns on her major project; her incentives do not correspond with what is best for the company (agency problem); and she may embarrass the company if the project comes in over budget. She has few tools with which to work. She has basic financial statements and managerial accounting statements. There were no interim statements to help her gauge the financial status of K3 or the new projects, factors that could influence her decision-making throughout...

Sue should implement the following technological changes. Project costs should be recorded throughout the project. There should be an information system in place that results in interim reports on project costs going to senior management, to avoid surprises. An audit system should be in place to ensure costs are allocated appropriately. In addition, the cost recording process should ascribe costs to a specific project, rather than to a general R&D ledger. This will simplify the audit process by making it easier to identify costs. Lastly, the flow of information and communication throughout the company should be improved.
Works Cited:

Cohen, J.R., Pant, L.W., Sharp, D.J. (2000, February). Project earnings manipulation: an ethics case based on agency theory. Issues in Accounting Education. 15(1), p89-104.

Jensen, M. (1994). Self-interest, altruism, incentives and agency theory. Journal of Applied Corporate Finance. Summer 1994.