The Institute of Management Accountants (IMA[R]) Committee on Ethics and IMA Professor-in-Residence Sandra B. Richtermeyer, CMA, CPA, are proud to announce that Elizabeth Dunn, CPA, has won the Best Case Award of the first annual Carl Menconi Case Writing Competition for her case, "Virtues in Conflict." The competition is named in memory of Carl Menconi, who held leadership positions in IMA for many years and served as the chair of the IMA Committee on Ethics. The objective of the competition is to develop and distribute business ethics cases with specific application to management accounting and finance issues and that use IMA's Statement of Ethical Professional Practice as a reference or guidance tool. The winning case and teaching notes are available for use in a classroom or business setting.
CASE NARRATIVE: VIRTUES IN CONFLICT
Sarah Grant is the CFO of Frame Tec, Inc., a large regional construction contractor with approximately 300 employees. The owners are exceptionally kind and intelligent carpenters who worked their way up in the business world through hard work and solid ethics. Sarah has enjoyed working with them for more than 10 years. They have accepted her as an essential part of the upper management team, and they rely on her judgment.
Sarah and the upper management team had a rough stretch about a year ago. Against Sarah's strongest recommendations, the owners decided to buy lumber directly from lumber mills and hired Jack Jones, a lumber professional, to handle the purchasing. Prior to this, Frame Tec utilized the services of resellers. Resellers usually provide fixed bids for lumber pricing when a project is estimated. They hold their prices and normally bear the risk for changing market conditions. Sarah was very concerned that the company was taking an unnecessary risk by losing protection from market fluctuation because lumber is Frame Tec's largest single cost. The market had been relatively stable historically, however, so Sarah accepted the owners' decision and hoped for the best.
The lumber market stayed fairly stable, and the past year was an excellent one for the company. Frame Tec's projects were profitable, and it signed new contracts sufficient for all of next year. Sarah is planning her portion of the next scheduled board meeting, where she will speak to the two owners of Frame Tec. They are anticipating the meeting to be filled with conversations about holiday bonuses and customer appreciation gifts, but Sarah has just received bad news. Her staff compiled the purchase orders for the projects in progress, and the actual cost of those orders is far above the expected costs for the projects.
Frame Tec's construction projects are long-term, fixed-price contracts. Construction accounting requires a close watch on estimated and actual costs. The company recognizes income using "cost-to-cost" percentage of completion. This means that actual cost incurred is compared to expected total cost for each project, and income is recognized based on the resulting percentage of completion. Generally accepted accounting principles proscribe the revenue recognition process very carefully, even to the extent of requiring recognition of 100% of projected losses as soon as they are apparent. Sarah had expected to recognize a substantial addition to income this month because many of the new contracts in progress are more than 20% complete. Booking a loss would be a major reversal of her expectations.
Concerned, Sarah headed to the purchasing department where Jack hesitantly tells her that market prices have skyrocketed. The combination of the recently declared war and a huge hurricane in Florida has driven lumber prices to unusually high levels. A new look at the project estimates shows them that the projected losses are significant. In addition to the current contracts in progress, the company signed several additional fixed-price contracts to complete …