Boston Chicken Case Study

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- Ethical Decision-making models in the Business World

Bowie & Velasquez Model:

- What are the facts?

- What are the ethical issues?

- What are the alternatives?

- Who are the stakeholders?

- What is the most ethical evaluation of the alternative?

- What are the constraints?

- Ignorance or uncertainty?

- Ability?

- What decision should be made?

- How should the decision be implemented?

- Under this decision-making model, Fleming admits four approaches for Step 5? i.e. the ethical evaluation of the alternatives

- The utilitarian/consequentialist model

- The rights approach

- The duties approach

- The justice approach

Method of Fictitious Financial Reporting

- Improper Revenue Recognition

- Improper Expense Recognition

- Improper accounting in connection with business combinations

- Other areas of improper accounting

Improper Revenue Recognition Illustrating Company

Improper Timing of Revenue Recognition

- Bill-and-Hold, Consignment Sales, and other SUNBEAM

Contingency Sales

- Holding Books open after close of a reporting SENSORMATIC

Period

- Multiple Elements contracts or bundle contracts XEROX

- Fictitious Revenue CUC/CENDANT

- Improper Valuation of Revenue INSIGNIA

- Improper capitalization of expenses or losses WORLDCOM

- Improper deferral of expenses or losses LIVENT

- Failure to record expenses or losses

- Overstating ending inventory values RITE AID

- Understating reserves for bad debts and loans losses ALLEGHENY

- Failure to record asset impairments LOCKHEED

SUNBEAM

SUNBEAM is presented mainly as an example of:

- Improper Timing of Revenue Recognition via bill-and-hold, consignment sales and other contingency sales;

- Improper Expense Recognition via the use of restructuring and other liability reserves

- Financial Misstatement by improper Timing of Revenue (Acceleration of Sales):

- Offered deep discounts and extended credit terms (to get customers to place the next period’s orders early)

- Contingent sales or guaranteed sales

- “Bill and hold” sales

(In which the customer is billed and a sale is recorded when the order is placed but the goods are held for delivery until a later date to entice customers to place future period’s sales order early.)

- Increased right of return without increasing reserves of returns

- Sold written-down inventories as regular sales cookie-jar reserve overstated

- Sold products that it planned to discontinue as part of its restructuring plan.

(These sales should have been reported separately from continuing sales as an infrequent event since the production line has been dropped, nut they were recorded as regular sales.)

- Recorded “inconclusive” sales

- Recorded rebates on future purchase as a deduction from the current period’s COGS.

(GAAP: Rebates should decrease the COGS in the period that the goods are sold)

- Extended quarter-end dare by two days

- Misleading press release about sales and earnings

- Conditions for recording “Bill-and-Hold” Sales

- The Buyer must request that the transaction be on a bill and hold basis

- The buyer must have a substantial business purpose for ordering the goods on a bill and hold basis; and

- The risks of ownership must have passes to the buyer

- Other relevant factors include: “whether (the seller) has modified its normal billing and credit terms for this buyer” and “seller’s past experience with and pattern of bill and hold transactions”.

- Signals of Sunbeam Fraud of:

Accelerating Revenue Recognition via bill and hold sales, consignment sales, and other contingency sales.

- Signal #1: The quality of a company’s leadership is the primary signals as to whether its financial statements are likely to be fraudulently reported. The ethics, ability, management style, and track record of the leadership of the company should be the first evidence an analyst or investor or investor looks at in examining financial reports for credibility.

- Signal #2: The leading sign of an overstatement of sales is when account receivable increases as a percentage of sales.

- Signals #3: The third of the sighs to look for as an indicator illegitimately reported sales are sudden changes in the gross margin percentage.

- Signals #4: CFFO falls, or when it lags behind operation income or net income.

(The sales were simply not turning into cash received at the rate they should have been if they were legitimate sales, and the gross profit margins were fluctuating wildly, without a clear explanation for