Question

EYK6-7. Accounting Ethics Case Reed Kohler is in his final year of employment as controller for Quality Sales Corporation; he hopes to retire next year. As a member of top management, Kohler participates in an attractive company bonus plan. The overall size of the bonus is a function of the firm’s net income before bonus and income taxes—the larger the net income, the larger the bonus.

Due to a slowdown in the economy, Quality Sales Corporation has encountered difficulties in managing its cash flow. To improve its cash flow by reducing cash payments for income taxes, the firm’s auditors have recommended that the company change its inventory costing method from FIFO to LIFO. This change would cause a significant increase in the cost of goods sold for the year. Kohler believes the firm should not switch to LIFO this year because its inventory quantities are too large.

He believes that the firm should work to reduce its inventory quantities and then switch to LIFO (the switch could be made in a year or two). After expressing this opinion to the firm’s treasurer, Kohler is stunned when the treasurer replies: “Reed, I can’t believe that after all these years with the firm, you put your personal interests ahead of the firm’s interests.”

Explain why Kohler may be viewed as holding a position that favors his personal interests.

What can Kohler do to increase his credibility when the possible change to LIFO is discussed at a meeting of the firm’s top management next week?

need to be a 2 page paper

Answer 1

Kohler may be viewed as holding a position that favors his personal interests, because he is of the opinion that the inventory must be reduced and then the organization must switch from FIFO to LIFO. This would mean that the organization will not be able to provide bonus in the current year. However, Kohler would be praised and acknowledged  by the management about his initiative to liquidate inventory and save on inventory related costs. Thus, he may also gain higher bonus for his valuable contribution, while the remaining employees may not receive any bonus.

Therefore, it now becomes of prime importance to Kohler to prove to the treasurer that his sole objective is to help the organization and not himself personally. He needs to first state that he would be retiring in a year's time, hence may not be available to reap the benefits of his suggestion. Further, he can prove that a FIFO system facilitates selling the products which are produced first, before the later produced products to the customers. This has it's own benefits. Firstly there is less to no risk of spoilage or the product being obsolete. Also, this will ensure the production process is smooth and facilitates as pull-based strategy which is highly recommended in a consumer-driven market. Then, Kohler can stress on the importance of inventory turnover and what measures can be taken to improve it's performance. By reducing the inventory first, the organization will be able to save on inventory related costs such as warehousing or space costs, labor costs, opportunity costs, etc. Also, the cash flow will be regulated and investments in the form of inventory will be liquidated and can be used to provide fluidity in the organizational finance. In addition to this, the space saved can be used for improvement and further expansion.

During meeting, Kohler can present these facts and figures and statistically prove that reducing inventory first and then making changes would benefit the organization in the longer run. Thus, though he may not enjoy the benefits of the proposed change, he would be content that his proposition has proved to be beneficial for the firm and the company has been able to save large amount of money. Also, the employees will not only receive the bonuses, but also be motivated towards improving the processes to increase productivity while minimizing wastes.