1-48 Ethical Issues
Source: Horngren, et al. (2014). Introduction to management accounting (16th ed., p. 49). Pearson.
Suppose you are controller of a medium-sized oil exploration company in western Texas. You adhere to the standards for ethical conduct for management accountants. How would those standards affect your behaviour in each of the following situations?
1. Late one Friday afternoon you receive a geologist’s report on a newly purchased property. It indicates a much higher probability of oil than had previously been expected. You are the only one to read the report that day. At a party on Saturday night, a friend asks about the prospects for the property.
2. An oil industry stock analyst invites you and your wife to spend a week in Tahiti free of charge. All she wants in return is to be the first to know about any financial information your company is about to announce to the public.
3. It is time to make a forecast of the company’s annual earnings. You know that some additional losses will be recognized before the company prepares its final statements. The company’s president has asked you to ignore these losses in making your predictions because a lower-than-expected earnings forecast could adversely affect the chances of obtaining a loan that is being negotiated and that will be completed before actual earnings are announced.
4. You do not know whether a particular expense is deductible for income tax purposes. You are debating whether to research the tax laws or simply assume the item is deductible. After all, if you are not audited, no one will ever know the difference. If you are audited, you can plead ignorance of the law.
6-3, 6-4 (illustrate your explanation with examples), 6-20 (illustrate your explanation with examples)
Source: Horngren, et al. (2014). Introduction to management accounting (16th ed., pp. 268-269). Pearson.
6-3. “Accountants do not ordinarily record opportunity costs in the formal accounting records.” Why?
6-4. Distinguish between and incremental cost and a differential cost. Illustrate your explanation with examples.
6-20. There are two reasons why unit costs should be analysed with care in decision making. What are they? Illustrate your explanation with examples.
Please be frank and creative in answering the following questions.
Suppose you’re on a TV game show, and you’re given the choice of three doors. Behind one door is a brand new car, behind the others, nothing. You pick a door. The TV host, who knows what’s behind the doors, chooses another door and opens it to show you that it has nothing. Should you change your decision?
Don’t think about this too deeply just yet. Do you feel (intuit?) that you should change your choice? Answer initially without researching the question. What is the thinking behind your answer. Conduct a survey of ten of your friends/colleagues to give their opinion. You may wish to provide them with a copy of the question. Include in your answer a table setting out the results of this survey. Also create a simple chart with Excel to present the results of your survey.
a (ii) After you answer the first part of this question, search the Internet for the Monty Hall problem. Provide your own explanation of the correct solution. Why do so many get the wrong answer? Did you?
b. A man goes to see his medical doctor to find out whether or not he has a deadly disease. The test is positive. The test is 95% accurate and one in one thousand men of his age has this disease. What is the probability he has the disease? He decides to seek a second opinion but the results are exactly the same. When this question was put to a group of doctors, 80% of them answered “95%”. He now plans to sell up all his assets, tell his boss what he really thinks of her, quit his job on the spot and live in Vanuatu in the time he has left. Is this a rational decision? Explain.
c. Suppose an urn contains 100 marbles, 75 red and 25 black. A marble is drawn at random from the urn and you are asked to guess what colour you believe the marble to be. The marble is then shown, replaced, and the urn’s contents again randomised. The aim is to maximise the number of correct guesses. Before reading any further, what strategy would you employ? What would you guess?
Assume 4 red come out in a row. What would your next guess be? Why? Include a brief discussion of the gambler’s fallacy.
d. Creatively discuss the rationality of human decision making using these and other examples. Use the Internet as a source (about 300 words for this section).
Write a business report on the significance of two of the following to managers and the function of accounting.
(b) Black Swans (Taleb)
(c) “Gray” ethical areas in accounting. See http://danariely.com/tag/ethics/
(d) Six Sigma
About 300-400 words each. Use the Internet as a resource. Give examples to illustrate your discussion.
Refer to the earlier section ‘Assessment Information’ for essay/report writing skill resources. The Internet can also be searched for business reporting advice