Cleveland Custom Cabinets Case Study

Case Study Examination and Ethical Questions

Ethics plays a vital role in developing accurate and high quality financial statements for management, financial institutions, and investors. As management utilizes financial statements to make decisions regarding the operations of the business, it is necessary to review accurate financial statements to make strategic decisions about the future of the organization. Investors and financial institutions require accurate financial statements to make informed decisions upon whether to invest funds into the organization or the wisdom of lending funds to said organization.

In the case of Cleveland Custom Cabinets, James Leroy is the sole owner and is of the opinion that providing inaccurate statements

to his lending institution is justifiable to receive expansion loans. The question arises as to whether his desired actions are ethical and should his accounting staff bow to his decree to ‘tweak’ the statements for the lending institution. Furthermore, individuals in business and personal situations must determine the ethics of decisions made and when it is right to be less than ethical when providing information.
Case Study: Cleveland Custom Cabinets
In the case of Cleveland Custom Cabinets, Mr.

James Leroy, the company’s sole owner is disappointed in the performance of his company as he intended to present the first quarter financial statements to the bank to acquire a $1 million loan to expand the company. Upon review of the statements it is explained by Mr. Leroy’s accountant Marcus Sims that the cost of company overhead doubled compared to the previous year due to a rise in rent, utilities, and repairs and maintenance of machinery causing the unexpected reduction in net profit.

Mr. Leroy, despite his understanding of the determination of net profit, is not pleased and instructs Mr. Sims to ‘tweak’ the numbers as he is the sole owner of the company and ‘owns the board of directors’ making the adjustment of the financial statements acceptable in his opinion. Is it acceptable that the numbers be adjusted because Mr. Leroy is the sole owner? No, it is not as Mr. Leroy has the responsibility to the board of directors to provide them with accurate financial statements as the board of directors has invested in this company and have the right to make informed decisions about the future of the company. Said decisions cannot be accurately made when provided with inaccurate financial

statements.
Such actions violate the six pillars of character developed by the Josephson Institute of Ethics; trustworthiness, respect, responsibility, fairness, caring, and citizenship (Mintz & Morris, 2014). Mr. Leroy has a responsibility to report accurate financial information to his board of directors and lending institution as they have entrusted their financial investment to his business. The Board of Directors has the right to utilize the information to make informed decisions about the future of the company and their investments.
Additionally, as a Certified Public Accountant and a Chartered Management Accountant, Marcus Sims has a responsibility to adhere to the Institute of Management Accountants (IMA) Statement of Ethical Professional Practice (SEPP). The SEPP clearly states that members must behave ethically, and those who fail to comply with the standards of the SEPP my face disciplinary action (Institute of Management Accountants, 2005). By ‘tweaking’ the numbers, Mr. Sims violates the standards of integrity and credibility.
Mr. Sims has vowed not to engage in any conduct that would discredit the profession. By complying with Mr. Leroy’s instructions, Mr. Sims is indeed discrediting the profession. Additionally, Mr. Sims is required to communicate information fairly and objectively and to relay all information that will influence decision making about the organization. Again, Mr. Sims would violate this standard should he comply with Mr. Leroy’s instructions. Therefore, Mr. Sims is duty bound by his membership of IMA to inform Mr. Leroy that he will not comply with the instructions to ‘tweak’ the numbers of the financial statements. Mr. Sims may also engage in a utilitarian analysis of the situation and determine it is best to comply.
Within a utilitarian analysis, Mr. Sims would determine the benefits and consequences and choose the path which returns the most significant balance of each (Velasquez, Andre, Shanks & Meyer, 2014). Under said analysis, Mr. Sims may determine that as Mr. Leroy has promised to engage in such actions only once; adjusting the numbers of the financial statement will allow the company to expand creating more income in the future, and providing more income for the board of directors. Additionally, such expansion would guarantee his position within the company remains intact. Consequently, should Mr. Sims comply, there is no guarantee that the expansion will provide increased net income, and may in fact cause further declines in net income threatening his position and the investments of the board of directors and lending institution. Mr. Sims should rely on solid ethical and moral principles and not comply with Mr. Leroy’s instructions.
Finally, should Mr. Sims comply and reduce the overhead by 50%, the result would increase net income for the quarter to $845,000.00, raising net income to 13.2% of sales from the correct figure of 1.4%. Would Mr. Leroy be happy with the results? He would be happier, and it would increase the potential of acquiring the loan he desires from his lending institution. Would he be content with tweaking the numbers only once? No, once an unethical action is successful individuals are typically tempted to engage in such practices again. Additionally, once an unethical action is taken it becomes increasingly easier for the individual to engage in such actions in the future.
Ethical Questions
Ethics can be directly related to rights.

When presented with a statement “There is a difference between what we have the right to do and what is the right thing to do,” it is a variance of what is legally beholden, and the morality of adhering to ethics by taking the correct path. What we have the right to do is interpreted by what is legally authorized by federal, state, or local government laws. The right thing to do is guided by personal conscience that tells the individual the correct thing to do (Mintz & Morris, 2014). It becomes a personal choice.

Beyond rights are ethical obligations, honesty, and truth-telling. Honesty and truth-telling are ethical obligations which are similar yet different. Honesty is a trait or character possessed by an individual. Honesty is the clerk in a shop who inadvertently overcharges a customer and refunds the excess while admitting their error. Truth-telling is an actual act of not fabricating facts, the facts as they exist are told by an individual. Truth-telling is the act of the honest clerk telling the customer of their

error.
In conjunction with truth-telling comes the question of whether it is ever right not to tell someone something they have the right to know. Whereas in most cases it is a legal requirement to divulge information to those with the right to know, such as purchasing a home, the seller is legally required to inform the buyer of all problems with the home. In other cases, it is right not to provide information to someone who has the right to said information. A terminally ill child has the right to know their health condition; however a parent may choose not to tell them to ensure they do not give up their battle. Empathy should prevail over the right to know, which can be linked to Kant’s rights theories respecting the worth and dignity of the child (Mintz & Morris, 2014). However, to Kant lying is unethical; therefore withholding such information violates his theories.
Loyalty in addition to empathy and caring is equally important in ethical practices. In many organizations employees are instructed to seek out their supervisor with information of wrongdoing within the organization. Such practice may not always be advisable. Considering a situation wherein the supervisor instructed the employee to engage in unethical behavior such as the case of Cleveland Custom Cabinets, it would be inadvisable for the employee to seek out their supervisor in such cases. In such cases, the employee should find a higher superior or even an outside organization to report such practices. In the case of Cleveland Custom Cabinets, Mr. Sims could speak with the Board of Directors. In the case of a publically traded company, the employee could speak with the Securities and Exchange Commission who regulates such organizations.
Finally, within the case of ethics is virtue theory in which the decision maker and the act must both be considered ethical. As in the case of Cleveland Custom Cabinets, should Mr. Sims take his concerns to the Board of Directors, he must not only state it is the ethically correct thing to do, but he must also believe it is the correct path to take (Mintz & Morris, 2014). He must determine what makes himself ethical and act on those traits, thereby expounding virtue theory ethics.

Conclusion
Ethics not only apply to business, they apply to individuals in all aspects of life. Possessing good character traits will enable individuals to follow an ethical path in personal experiences and most especially in business experiences. Such qualities will enable an individual to succeed in all ventures providing them with a good reputation to engender trust in potential investors and clients alike.