RE: Case 10B-5 RE: Case 10B-5

Deangela Dixon

11/27/2012 3:57:53 AM

Deangela Dixon

11/27/2012 3:57:53 AM

Question 3. What should Stacy Cummins do in this situation?

Ms. Cummins should bring the manipulation of earnings to the attention of the audit committee of the Board of Directors in a nonconfrontational manner about the problems created by Lansings practice of manipulating earnings. If the President and the Board of Directors are still not interested in dealing with the problem, she conclude that the best alternative is to start looking for another job. If Merced Home Products becomes embroiled in controversy concerning questionable accounting practices, Stacy Cummins will be viewed as a responsible party and her career is likely to suffer dramatically and she may even face legal problems.

RE: Case 10B-5

Deangela Dixon Modified:11/25/2012 5:24 AM

11/25/2012 5:03:14 AM

The standard costs are developed based on direct and indirect costs budgeted. A standard cost system is a method of setting cost targets and evaluating performance as well as setting cost targets and evaluating performance.It ia also used as a means of helping managers with decision making and control. The standards are set too high. When the products are run at a lower cost than the standard, then this produces a favorable variance. The cost of goods sold and variance should net the correct cost, and this is the reason the system creates the variance. Lansing set a loose standard which the standard quantities and standard price are high. This situation produces favorable variances that will ordinarily result from operations. When the standard cost is set artificially high, the standard cost of goods sold also will be artificially high, and then the divisions net operating income will be depressed until the favorable variances are recognized. If Lansing saves the favorable variances, he can release just enough in the second and third quarters to show some improvement and then he can release all of the rest in the last

quarter,thus creating the annual Christmas present. Finished goods inventory is valued at the standard cost. If there is a lot of inventory at an inflated cost, then the cost of goods sold is being reduced on the income statement too much. If the inventory were to be revalued at its correct standard cost, there would be a large expense to the income statement.
RE: Case 10B-5 Deangela Dixon 11/28/2012 2:50:21 AM

Modified:11/28/2012 3:27 AM

Merced Home Products, Inc., financial statement should actually provide a true not false basis for evaluating what has happened in the past. A true statement would give insight to the company's profitability, productively, and liquidity. Yes it is disturbing to me that a V.P. has rigged standards! For real that seems to be the way of the world today. Actions like this brings a company down and in some cases has people killing themselves. It is in the media about what happens to companies that adhere to such practices. Overall all of employees of the company suffers so way because of poor unethical decisions from top brass. The auditor serves as an independent intermediary to help ensure that management has in fact appropriately applied GAAP in preparing the companys financial statements. Auditors examine financial statements to express a professional, independent opinion. The opinion reflects the auditors assessment of the statements fairness, which is determined by the extent to which they are prepared in compliance with GAAP. Since the company does not want to go along with or do anything about the unusual use of standard costs, the company has no other choice but to make sure their lawyers are in place. Misstatements can arise from fraudulent financial reporting and/or from misappropriation of assets (sometimes referred to as theft or defalcation). The Auditing Standards Board defines misstatements, and describes the types of misstatements that anti-fraud measures are intended to mitigate, as follows: Misstatements arising from fraudulent financial reporting are intentional misstatements or omissions of amounts or disclosures in financial statements designed to deceive financial statement users where the effect causes the financial statements not to be presented, in all material respects, in conformity with generally accepted accounting principles (GAAP). Fraudulent financial reporting may be accomplished by the

following: Manipulation, falsification or alteration of accounting records or supporting documents from which financial statements are prepared Misrepresentation in or intentional omission from the financial statements of events, transactions or other significant information Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation or disclosure
http://www.grantthornton.com/staticfiles/GTCom/Audit/Assurancepublications/Audit%20committee%20 guides/ACH_Guides_Managing_Fraud_Risk_.pdf RE: Variances Deangela Dixon 12/1/2012 5:18:19 PM

A favorable/unfavorable price variance does not effect your quantity variance. The reason you would see a favorable price variance and an unfavorable quantity variance is because there was more consumption of materials than your standard allows and the price you paid for those material was less than your standard price. If you paid more than your standard price, you would have experienced an unfavorable variance in both quantity and price. This combination of variances may indicate that inferior quality materials created production problems. An unfavorable variance results when budgeted revenues exceed actual revenues.
RE: Case 926 11/25/2012 5:47:16 AM

Deangela Dixon Modified:11/25/2012 5:56 AM

Prating should redo the performance report to recognize the efficiency variances. This might make the performance look better, or make the performance look worse. For Prating and Kapp to collaborate to mislead corporate headquarters violates the credibility standard in the Statement of Ethical Professional Practice by the Institute of Management Accountants. The credibility standard requires that management accountants disclose fully all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analysis, or recommendations. Failing to disclose the entire amount owed on the industrial engineering contract violates this standard. Honestly it would be hard to imagine how a controller could ethically agree to go along with reporting the

favorable $6,000 variance for industrial engineering on the final report. It would also be misleading to include all of the original contract price of $160,000 on the report, but to exclude part of the final cost of the contract. Prating should call Maria even if the bill does not arrive because he is ethically bound to properly accrue the expenses on the report. For Colorado Springs this will mean an unfavorable variance for industrial engineering and an overall unfavorable variance. Prating should consider taking the unethical procedure that Kapp wants to have done to a higher managerial level within the company.
: Case 9-26 Deangela Dixon 11/26/2012 7:07:59 AM

Business ethics reduce a company's freedom to maximize its profit. Because the mangers have so much pressure to perform at certain levels, they often resort to unethical practices to compensate for unfavorable results. These actions will eventually end in results unfavorable to the organization. The Institute of Management Accountants (IMA) sets standards of ethical conduct for management accountants in the areas of ccompetence, cconfidentiality, iintegrity, and ccredibility. Colorado Springs does not comply with this if they continue to present a favorable variance that is untrue. It would seem pretty clear since Prating was doing a preliminary draft report the sooner attention can be directed towards fixing any problems. Only the things that actually happened are to be recorded.
RE: Case 9-26 Deangela Dixon 11/28/2012 4:56:56 AM

If I was in Mr. Pratting';s shoes I would resign basically Mr. Kapp is corrupt and unethical. In the long run Mr. Kapp's tactics will catch up to him. The purpose of cost control is the tender amount and final account should equate with the budget estimate. An unfavorable variance refers to a difference between an actual experience and a budgeted experience. If there is always a negative reaction to unfavorable variances this may impact employee morale in that employees might not want to be as productive and work slower. Employees may seek shortcuts that may negatively affect the company.