Accounting sample assignment-3

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Question 1

A.)  Why was Ellie, who is accountable for a responsibility centre, not satisfied with bonuses based on final profit for the centre?

The passage has not given too many details but the few key points are that Ellie was paid a low fixed salary and the rest of her pay was based on bonuses from the net profit of her responsible profit centre. By definition, a responsibility profit centre is a specific department, product, brand or line where a manager is responsible for all ‘controllable’ costs and revenues occurring at that place. This type of managerial accounting is introduced in order to control for the costs and revenues and to be able to identify a personnel responsible for controlling them.

There could be several reasons why Ellie wasn’t satisfied with bonuses based on final profit of the centre. Dominiak and Louderback (1988) fundamentally highlight manager’s personal behavioural problems with the appraisal system as the most common factor for disliking a pay system linked to profit centre performance. Ellie might feel that she does not have sufficient control over costs or other overheads apportioned. This could be due to nature of her responsibility centre or because senior management has not given her the authority too. In such a case, Ellie is forced to receive lower bonus pay since these costs cut off from gross profit leaving the final profit figure lower. In case of overheads being apportioned to her centre, she might feel that there is an unfair system in place for these overheads to be allocated and once again she has to suffer from lower bonus pay.

The important thing here is that since Ellie is paid low fixed salary, bonus pay are very crucial to her and uncertainties by linking this pay to final profit could be putting her at unease. If she convincingly believes that the overhead costs are out of her control or being allocated unfairly, she would be de-motivated as she would consider her pay being ‘punished’ by being linked to the net profit figure at which she has no control.

On the flip side, it could be that Ellie was a person who excelled in marketing and selling but wasn’t a strong controller of costs and financial matters. Therefore, she could earn lots of gross profits by selling more and more, but wasn’t able to creatively minimize selling and administration expenses. Thus, she desired bonuses to be linked to the gross profits.

 

B.)  Why might it not be in the best interests of the owner-manager of the firm to base employee bonuses on the gross profit of the responsibility centre?

As Garrison and Noreen (2000) stated that someone has to be made responsible for costs else these costs can go out of control. By linking employee bonuses to the gross profit of the responsibility centre, there are going to be two crucial implications. First, implication is that by not making the manager responsible for the final profit figure, he/she may not be attentive towards the indirect costs. It’s not the gross profit, but the final net-profit figure which is of use to the owners. This point is fundamentally more important in companies dealing with service offerings. In such companies, there are hardly any direct costs and gross profit figures can be very high and misleading as well. The indirect costs are much more and the net profit figures giver more clearer picture of profit centre’s performance. The second implication is that a system whereby gross profits are rewarded may encourage the employees to sell more and more for the sake of earning bonuses regardless of overhead costs being incurred. For example if a costly marketing programme results in a mere increase in sales, this would be reflected in the gross profit. But when the net profit figure is considered, the mere sales would be outdone by the cost incurred in marketing. Thus, based on these two implications, it’s clearly not in the best interests of owners to link bonus pays to gross profits.

Meanwhile, it could be likely that the cost and revenue structure of different responsibility centres within the same organization are different and so would have differing gross profit figures. This could lead to resentment between employees from different responsibility centres. For example, a service offering and a product offering would have differing gross profit figures and in order to have equitable bonus systems, it might be better to link bonuses to net profit figure. Such way, everyone is responsible for the final profit they are providing to owners and so are to be compensated based on this figure. However, as analyzed in the previous question, the evaluation has to be fair and costs and revenues included in the evaluation must be in control of the employees.

 

C.)  What would be the most effective way of determining employee bonuses that should satisfy the requirements of both employees and the owner-manager?

No matter what method of employee bonus pay is implemented, as Glynn et al (1988) suggest, the fundamental objective to be achieved in the end should be that the bonus system should help motivate employees which propels them to work harder. These hard dedicated efforts should then help achieve the organizational goals of the company.

For the system to be effective, the bonus system should be considered fair by the employees and justified for the owners. It has been documented by various researchers and motivational theorists that other than pay, bonuses also serve as important psychological employee perceptions of appreciation for hard work. Motivational theorists have identified that recognition for a job well done as a critical factor which can earn employee commitment and dedication. The bonus pay system should therefore be fair, measurable and importantly practical to the employee. As Solomons (1983) states that an employee should have full delegation and authority over resources and decisions which are likely to affect his performance appraisal. It would be unfair to reward poor bonus pay to an employee when profits go down due to reasons beyond his/her control.  Adding Glynn et al (1988) who claimed that managers/employees are only accountable when they have been given realistic control over their responsibility centres/domains. Thus, the bonus pay system should be fair, realistic and within control and reach of employees for them to be motivated and loyal to the company.

Meanwhile, it could also be a wise idea to actually involve managers and if possibly employees in the process of setting bonus pay systems. Such a way would make them be more motivated and also make them more committed to the system as they have had a say in its setting up. Furthermore, the owners/senior managers should also ensure that appraisal systems are designed two-way, that is managers/employees are given a chance to defend their poor performance. This approach would avoid all the disadvantages which an autocratic leadership system suffers from. There should be support provided by higher hierarchies at all times. They should always keep in mind that bonus pay is way of rewarding hard work rather than penalizing mediocre performance. It is a way of correcting for weaknesses and a two way consultative approach should be adopted to correct for such weaknesses. On the other hand, hard work should fairly be recognized and duly compensated.

 

 

 

Question 2

Data:

Selling price = $1200/300 = $4

Variable Costs = $660/300 = $2.2

A.)  Calculate the break-even point in dollars of sales for the year ended 30 June 2010.

Contribution = selling price – variable costs = $4 – $2.2 = $1.8

Break-even point in units = Fixed Costs / contribution = $ 470 000 / $1.8 = 261 112~~

Break-even point in dollars = 261 112 * 4 = $1 044 448

 

B.)  Calculate the break-even point for each of the options being considered by management.

Option 1: Adjust costs of sales to 50% fixed and 50% variable = $447,500 variable costs and $447,500 fixed costs. Total costs = $895,000

Contribution = $4 – 1.69~ (507.5/300) = $2.31

Break-even point in units = Fixed Costs / contribution = $ 622 500 / $2.31 = 269,481~

Break-even point in dollars = 269 481 * 4 = $1 077 924

 

Option 2: Increase sales price by 15%

New Variable cost per unit= $660,000/270,000 = $2.44

Contribution = $4.6 (4 * 1.15) – $2.44 = $2.16

Break-even point in units = Fixed Costs / contribution = $ 470 000 / $2.16 = 217,593~

Break-even point in dollars = 217,593 * $4.6 = $1 000 928

 

Option 3: Changes Sales staffs pay system

New Variable Cost = $660 000 + $ 60 000 (0.05 * 1200k) = $720 000

New Fixed Cost = $470k – $105k + $32k = $ 397 000

Contribution = $4 – $2.4 (720/300) = $1.6

Break-even point in units = Fixed Costs / contribution = $ 397 000 / $1.6 = 248 125

Break-even point in dollars = 248 125 * 4 = $992 500

~ = rounded to the next full unit, for example 217 592.59 rounded to 217 593.

 

C.)  What action should be recommended to management? Explain why.

From the three options, Option 1 is highly NOT recommended. Even though it offers the greatest contribution of $2.31 per unit sold to cover for fixed costs and earn net income, Option 1 will actually make the company worse off. By increasing the amount engaged in fixed costs, the company will need to sell more units in order to break even. Our calculations show that the company would need to sell 269 481 units in order to break-even; this is more than the currently required 261 112 units. Thus, in times when sales are under pressure, option 1 is not a wise idea.

Between options 2 and 3, option 3 shows the lowest break-even point in terms of dollars. However, this figure is misleading, since in terms of units, option 2 is the lowest by far to achieve break-even. This dollar figure is misleading, since in option 2, the price is being increased and so the amount of revenue needed to breakeven appears higher, even though the unit quantity required to be sold is lower. With option 2, 217 593 units are required to be sold while with option 3, 248 125 units are required to be sold. Option 2 also offers much greater contribution of $2.16 towards fixed costs and net income per unit sold compared to $1.6 from option 3. Thus, in times when sales are under pressure, option 2 is the preferred choice as it minimizes risk of loss from falling unit sales.

 

Question 3

Should the offer be accepted if there are no alternative uses for the manufacturing capacity currently being used to produce the casings? Why?

Cost being incurred currently per unit of casing = $ 48.50

Total Fixed factory overhead costs = $ 1 280 000 (80 000 * 16)

If the casings are purchased instead, overhead costs to be saved = [(80 000 * 16) / 2] = $640 000

However, this means that $640 000 still has to be incurred as a factory overhead as the question specifically mentions that only half of this direct fixed cost can be eliminated.

Therefore, in such a situation, if the castings are purchased from outside, and if we apportion the remaining fixed factory overhead to the castings purchased, fixed factory overhead per unit becomes $8 ($640 000 / 80 000 units). This means that the actual cost incurred per casing becomes $50 each. This clearly means each casing is actually going to cost $1.50 more than by self producing at $48.50 each. The offer should clearly not be accepted since the casings manufacturing are absorbing fixed factory overheads and as long as other more efficient uses for the manufacturing capacity is not available, the casings should continue to be produced.

 

 

Question 4

A.)  Rank the three machines using each of the following methods

Net Present Value Method:

Discounting Factor is 16%. The estimate life is 10 years.

Diamondo

The estimated life is 10 years. The Present Value of an annuity of periods 10 and discount factor 16% is 4.8332. Estimated annual net cash inflows in annuity is $ 250 000.

Therefore, the present value of 10 payments $ 250 000 each discounted at 16% is $ 1 208 300 ($ 250 000 * 4.8332).

Since the initial cost of machine is $ 1 200 000, there is positive net present value of this investment of $8 300.

Divine Diamonds

The estimate life is 12 years. The Present Value of an annuity of periods 12 and discount factor 16% is 5.1971. Estimated annual net cash inflows in annuity is $ 200 000.

Therefore, the present value of 12 payments $ 200 000 each discounted at 16% is $ 1 039 420 ($200 000 * 5.1971).

Since the initial cost of machine is $ 1 000 000, there is positive net present value of this investment of $39 420.

Rough Diamonds

The estimate life is 8 years. The Present Value of an annuity of periods 8 and discount factor 16% is 4.3436. Estimated annual net cash inflows in annuity is $ 200 000.

Therefore, the present value of 8 payments $ 200 000 each discounted at 16% is $ 868 720 ($200 000 * 4.3436).

Since the initial cost of machine is $ 900 000, there is negative net present value of this investment of $(31 280).

 

Rankings in order = Divine Diamonds, Diamondo & Rough Diamonds

Payback Period:

Diamondo

Cost of Capital Investment / Net Annual Cash Flow = $ 1 200 000 / $250 000 = 4.8 years. The time period required to recover the cost of the capital investment from the annual cash inflow produced by the investment is 4 years 9 months and 16 days.

Divine Diamonds

Cost of Capital Investment / Net Annual Cash Flow = $ 1 000 000 / $200 000 = 5 years. The time period required to recover the cost of the capital investment from the annual cash inflow produced by the investment is 5 years.

Rough Diamonds

Cost of Capital Investment / Net Annual Cash Flow = $ 900 000 / $200 000 = 4.5 years. The time period required to recover the cost of the capital investment from the annual cash inflow produced by the investment is 4.5 years.

Rankings in order = Rough Diamonds, Diamondo, Divine Diamonds

 

Return on average investment method:

Average Investment = (Original Investment + Value at End of Useful Life) / 2

Return on Average Investment = Expected Annual Net Income / Average Investment

Diamondo

Average Investment = $ 1 200 000 / 2 = $ 600 000

Return on Average Investment = 370 000 / 600 000 * 100 = 61.7%

Divine Diamonds

Average Investment = $ 1 000 000 / 2 = $ 500 000

Return on Average Investment = 320 000 / 500 000 * 100 = 64%

Rough Diamonds

Average Investment = $ 900 000 / 2 = $ 450 000

Return on Average Investment = 320 000 / 450 000 * 100 = 71.1%

Rankings in order = Rough Diamonds, Divine Diamonds, Diamondo.

B.)  Comment on the rankings under the four methods of evaluating the machines and explain which method will provide the best results for the firm and why payback period or return on average investment might be preferred by Rocks Ltd

The Net present value method is a very useful method as it considers the time value of money and discounts it appropriately. However, it ignores the profitability aspects and just looks at cash flow returns. The payback period calculates after how long an investment will return the amount originally invested. It ignores the time value and profitability aspects of an investment. Finally, the average return on investment technique compares the returns being presented by an investment and compares it with alternative investments. The minimum return expected is usually the company’s cost of capital which in this case here is 16%. The limitation of this approach is once again it ignores the time value of money.

From our 3 machines, in terms of Net Present Value method, Divine Diamonds is the best choice because after discounting for time value, its cash inflows are the most positive at the end of the period. However, when looking at Payback period, Rough Diamonds gives the fastest return which however had a negative NPV. In terms of return on average investment, all 3 machines give above the minimum returns with maximum being again given by Rough Diamonds followed by Divine Diamonds.

Rocks Ltd might prefer the payback period since it ensures how quickly the original investment is recovered which means the firm can use this cash for other purposes. Quicker returns also mean risk from changing economic conditions is less with a shorter payback period.

Rocks Ltd might prefer the return on average investment methods as it speaks about profitability and the higher the profit percentage, the more attractive the investment seems. However, the NPV is a very important tool which while ignoring profitability definitely accounts the important factor of time value of money. Therefore, NPV would be the most reliable method and the choice should be Divine Diamonds. This is because even though its profit percentage turns out to be less on investment, it provides stronger positive real value of money in future. As long as its return on investment is not below the minimum and payback period not greater than the set standards of company (here its 41.7% [5 years/12 years]), following NPV, choice of Divine Diamonds should be made.

 

 

 

 

 

 

 

 

 


Assignment 2

Question 1

  1. A.    Calculate the following ratios for both companies:

Current Ratio = Current Assets / Current Liabilities

Woodland Bank = 179 100 / 72 000 = 2.49 : 1

Burbank Ltd = 185 220 / 75 600 = 2.45 : 1

Quick Ratio = Cash + Short-Term Investments + Net Receivables / Current Liabilities

Woodland Bank = 18 000 + 86 400 / 72 000 = 1.45 : 1

Burbank Ltd = 20 160 + 89 460 / 75 600 = 1.45 : 1

Inventory Turnover = Cost of Goods Sold / Average Inventory (Opening plus closing inventory)

Woodland Bank = 435 400 / (67 500 + 72 900 / 2) = 6.2 times

Burbank Ltd = 448 580 / (64 260 + 71 820 / 2) = 6.6 times

Average Collection period for receivables = 365 days / Receivable Turnover Ratio (Net Credit Sales / Average Net Receivables)

Woodland Bank = 365 / (650 000 / (79 200 + 86 400 / 2) = 46.5 days

Burbank Ltd = 365 / (673 920 / (83 160 + 89 460 / 2) = 46.7 days

Which Company do you think is the better short-term credit risk? Give reasons for your answer.

Both companies are neck to neck and have financially healthy positions. Both of them are solvent in the short term. In terms of current ratio, Woodland bank is slightly better at $2.49 worth of current assets compared to Burbank’s $2.45 for a $1 worth of current liabilities. At the acid test ratio, both have equal $1.45 of quick turning current assets for every $1 of current liabilities. Inventory turnover for both is again same with Woodland Bank being slightly slower at 6.2 times per year. Burbank has faster turnover which might give at an edge as its cash is less tied in stock due to frequent turnover rates. Of course, the consideration of the stock size is important. The collection period from debtors for both is also similar with Woodland Bank having 46.5 days and Burbank Ltd having 46.7 days. Therefore, both companies are almost identical in short-term financial credit risk and both are financially sound as well by looking at the results of the Quick and Current ratios. Purely in terms of short-term credit risk, Woodland Bank has a negligible edge over Burbank Ltd.

B.) Calculate the following ratios for both companies (ignore income tax):

Rate of Return on total assets = Net Income / Average Assets (Opening plus closing total assets)

Woodland Bank = 46 980 / (459 000 + 477 000 / 2) = 10.04%

Burbank Ltd = 39 780 / (521 640 + 536 760 / 2) = 7.52%

Rate of Return on equity = Net Income / Average Common Stockholders’ Equity (Opening plus closing total assets)

Woodland Bank = 46 980 / (180 000 + 106 200 + 297 000 / 2) = 16.11%

Burbank Ltd = 39 780 / (180 000 + 48 600 + 335 160 / 2) = 14.11%

 

Which Company do you think is the better investment? Why?

Using the above two ratios, Woodland Bank is definitely a better investment, since it shows that every $1 worth of assets results in 10.4 cents of profit compared to 7.52 cents profit for every $1 asset in Burbank Ltd. Therefore, Woodland Bank is utilizing lesser value of assets to generate greater profits. In terms of ordinary shareholders’ equity investments, again Woodland Bank ordinary shareholders earn 16.11 cents per $1 investment compared to Burbank Ltd shareholders earning 14.11 cents per $1 invested in equity. Therefore, Woodland Bank is a better investment in terms of returns being generated on total assets and total ordinary shareholder’s equity.

C.) What other analysis may be carried out to help in decision making?

The above analysis is inadequate to convincingly reach a conclusion regarding both the banks. Most important is the need to have industry’s average ratios as benchmark when analyzing results for all ratios to be compared to. The industry average will determine whether the firms are performing par industry standards or not.

The liquidity ratios were fine although in order to determine the effectiveness of the average collection period for receivables ratio, it is important to calculate the average payment period for payables. The average collection period ratio should not greatly exceed the credit term period for payments.

There needs to be analysis done on the profitability in terms of sales to calculate the efficiency levels in terms of costs, for example net profit margin and gross profit margin ratio. This would identify which firm is efficient or inefficient in managing its overhead and direct costs and these ratios could be compared to industry average to check once again if the firm is performing below, at par or above industry standards.

Investors may also calculate returns on stockholders equity in other industries and riskless treasury bills to determine whether this investment in either Woodland Bank or Burbank Ltd is better off compared to other securities being offered. Other ratios they could calculate also involves earnings per share and price-earnings ratio which would help determine whether the stocks are highly priced in the market in terms of earnings it generates.

For checking solvency, debt to total asset ratios could be calculated to check upon the gearing levels of the companies as well as times interest earned ratio can be calculated to determine the ability of the company to meet its interest servicing obligations. Low time’s interest ratio can be alarming as it signals risk of interest payments not being met with enough profits earned.

Collectively, all these ratios would help make better informed judgements regarding the company’s position and its related decision making.

 

 

 

 

 

 

 

 

 

 

 

Question 2

A.)  Who are the stakeholders in such situations? Explain.

Freeman (1984) defines stakeholders as any individual or group who can affect or is affected by the actions, decisions, policies, practices, or goals of an organization. Weiss (2009) further classifies stakeholders into two groups; primary and secondary stakeholders. Primary stakeholders are all internal members affiliated with the organization while secondary stakeholders are external members with affiliation with the organization.

In the given article extract, the primary stakeholders are owners, managers, researchers, employees, customers, suppliers and everyone else directly involved internally within the British cancer research organization. For example, Donors towards the cancer research organization are also vital primary stakeholders and they are expected to be very upset to hear that their donations towards cancer research are actually invested by the organization in tobacco companies. The secondary stakeholders include all other interested groups in the cancer research organization such as governments, lobbyists, NGOs, media, courts, competitors, local communities and all other external members of the civil society who are likely to have an impact from/on the cancer research organization. For example, NGOs fighting against cancer and discouraging the sale of tobacco would be likely to negatively publicize the hypocritical action by the cancer research organization of investing in a tobacco company; tobacco being an evil known to cause cancer.

As explained above, any decision taken by an organization is not independent from affecting third parties and the stakeholders include a lot more people and groups other than owner-manager-customer deals.

 

B.)  If ethical shares earned a lower rate of return than other shares, how much lower return would you be prepared to accept and still invest in ethical shares only?

The question is quite subjective and the responses are likely to vary from person to person based on their ethical standings. Before answering the question about what rate should one be prepared to accept, I would like to highlight the sayings of Kant (1724-1804). Kant asserted that some acts are universally right or wrong independently of their consequences He saw humans as rational actors who could decide these principles for themselves. Hence, humans could therefore also be regarded as independent moral actors who made their own rational decisions regarding right and wrong.

If I am to heed to Kant’s advice, I am responsible for my own ethical actions and if I am a true believer in ethics, I should only invest in ethical compliant shares regardless of how much the rate of return is lower than non-ethical compliant shares.

However, on the other hand, The Nobel-Prize winning economist Milton Friedman published an article that has the provocative title ‘The social responsibility of business is to increase its profits’. In this article he vigorously protested against the notion of social responsibilities for corporations. He based his argument on three main premises:

His first substantial point was that corporations are not human beings and therefore cannot assume true moral responsibility for their actions. Since corporations are set up by individual human beings, it is those human beings who are then individually responsible for the actions of the corporation.

His second point was that the only responsibility of the managers of the corporation is to make profit, because it is for this task that the firm has been set up and the managers have been employed. Acting for any other purpose constitutes a betrayal of their special responsibility to shareholders and thus essentially represents ‘theft’ from shareholders’ pockets. Friedman’s third main point was that managers should not, and cannot, decide what is in society’s best interests. This is the job of government. Corporate managers are neither trained to set and achieve social goals, nor (unlike politicians) are they democratically elected to do so.

Therefore, there are two schools of thoughts and two opposing viewpoints regarding investments in ethical friendly shares versus shares giving greater returns but not ethics complying. However, in spirit of ethics, and since my ethical standings are quite rigid, I would keep only ethically complying shares as an option for investment no matter what the returns are.

If a company is known to exploit resources and abuse its power, by investing in it, I am displaying a sign of greed for greater returns regardless of the other stakeholders who are suffering at the company’s hands. Having a spiritual conscience and religious faith, my investment would be in shares which provide clean and ethical returns. Thus, in my subjective opinion, greater returns cannot buy my conscience and I would be prepared to accept the best returns from ethically complying shares, even though these best returns might be significantly lower than non-ethics complying shares.

 

 

C.)  In some countries, most employed people have compulsory superannuation. Superannuation funds invest a large percentage of their funds in shares and are often the largest shareholders in many companies. Do you believe that most employees know or care what companies their superannuation is invested in? Could a lack of care be construed as unethical behaviour?

Superannuation or most commonly known in other countries as pension funds, are compulsory payments into a fund by employees which are then made available to the employee after meeting certain criteria, usually after retirement from mainstream work. There is no secret that superannuation funds are very powerful investors. In fact, The Economist (Jan – 2008) reported that Morgan Stanley estimates that pension funds worldwide hold over US$20 trillion in assets, which is the largest for any category of investor ahead of mutual funds, insurance companies, currency reserves, sovereign wealth funds, hedge funds or private equity.

Regarding whether employees know or care about what companies these funds invest in, Friend of Earth, an NGO based in UK reports that before July 3rd 2001, pension fund members in UK had actually no right to be informed about their pension fund’s ethical, social and environmental stance. However as a result of growing public demand for more socially responsible investment, as well as pressure from NGOs, the Pensions Act was finally amended.

The above report from the NGO actually provides two explanations at least from the UK perspectives, that, first people did care about where the funds were invested in and second that they normally didn’t know where the funds were invested in.

Furthermore, Zhang (2009) gives some other statistics. Zhang cites the Social Investment Forum which states that the professionally managed assets of Socially Responsible Investment (SRI) portfolios in the United States, including retail and, more importantly, institutional funds (for example pension funds), reached $2.7 trillion in 2007, or approximately 11% of total assets under management in that country. In 2007, SRI assets in Europe amounted to €2.7 trillion, representing 17% of European funds under management (European Social Investment Forum). These statistics have two important implications. First implication is that there is growing awareness and rise in the need for ethically complying investments. However, the figures of 11% and 17% could literally mean that the ‘care’ element in people regarding ethically complying investment is still minimal. And then again, USA and Europe are more ethically considerate countries than the rest of the developing world. So if these figures are so low over there, one can imagine the conditions in developing world regarding ethical investments.

So in conclusion regarding employees’ concern on where the superannuation funds are investing, there is growing awareness regarding ethical investments, but still a lot of work needs to be done. The ethical investment figures remain low, but knowledge and care is slowly being reflected and there are media reports about major pension funds abandoning investments in the name of ethics. For example, on 29th March 2010, the largest Swedish pension fund Forsta-AP Pension Fund, banned investment in Israeli defence electronics company Elbit systems because it had built and is operating a surveillance system for the much debated West Bank separation barrier which has been a major controversy. This action by the Swedish fund followed an earlier similar move by Norway’s state oil fund.

Now to concentrate on the last part of the question, could a lack of care be construed as unethical behavior? I would quote Kant again when he said that humans are responsible for their own actions. I would also like to quote the idea of natural rights, as articulated by John Locke (1632-1714) which states that humans (by their very nature) have a right to life, freedom, liberty and property which should be respected and protected, and thus, that we all have a duty to respect these rights with regard to others (and have our rights in turn respected). People are all part of a broad social network and everyone is affected in one way or the other by unethical practices. If a corporation is exploiting and acting unethically, then some stakeholders’ rights are being violated. When a mutual or pension funds investor refrains from insisting on ethical investment, it is his or her money which is used by the fund managers and then invested in non-ethical companies which are further encouraged to exploit and upheld people’s rights. This, to me, does construe an unethical behaviour.

With regards to employees and their superannuation fund, it is the duty of the employees to demand that their fund companies comply with ethical-friendly policies and the money should be put to companies which help protect the world and respect the stakeholder rights.

In conclusion, I believe there is growing awareness in employees regarding ethical friendly practices, but the gravity of the issue is taken lightly and the care is not significant as investments in SRI remain low. And by not taking the issue seriously, the employees themselves demonstrate unethical behaviour.

 

 

 

 

Question 3

Discuss whether what the budget communicates is consistent with the stated position on environmental issues of Bonza Resources Ltd and how this might affect your continuing employment with the company.

The budget is surprisingly at odds and contradiction with the ‘claimed’ stance of Bonza Resources Ltd regarding environmental protection. Bonza Resources have claimed that protecting their environment while mining is one of their most important goals. It is like their marketing slogan with which they wish to promote themselves as ethically complying company and they have hired me to promote this slogan in order to attract stakeholder support and appreciation.

In the budget, I have been given a large amount of resources to support my job in order to promote the company’s claimed positive environmental stance. The availability of large amount of resources is always welcome and definitely makes my job easier. The job can be quite difficult and frustrating especially when minimal resources are allocated and maximum is expected by senior management. So, my job is good; I am a business ethics promoter, so I am involved in the clean job and I have been given a lot of resources to promote the clean job.

However, it does feel that my employer is rather shrewd and rogue. Basically, he is giving me a lot of resources to cover up his dirty tactics. It is evident in the budget that allocations have been made for ‘bribing’ politicians in order gain rights for mining in national parks. National parks are classified as ‘environment protective zones’ and are usually not given permission to be destroyed in any ‘green-supportive’ societies.  My employer is actually buying politicians in order to extract minerals from such parks and this is ethically at odds with its environmental protection claim.

Meanwhile, economic efficiency is emphasized in the budget with no grants for regeneration or re-vegetation of extracted sites. This is sufficient enough to claim that Bonza Resources Ltd is NOT an environmental friendly mining company. Thus in conclusion, the budget is inconsistent with the company’s stated position on environmental issues.

With regards to my continued employment in the company, it is a tough ethical choice to be made. I am specifically hired to promote the company’s positive environmental image; however, by looking at the budget, I can understand that this is a bogus cover up of the unethical practices intended by the company. I could compromise on my conscience and use the resources given to me and support the company’s positive image. Or I could quit my job and walk away.

To help me make a decision, I would like to make use of an ethical decision-making model. Jones (1991) provides the most comprehensive synthesis model of ethical decision-making’. According to this model, individuals move through a process whereby they:

  • Recognize a moral issue
  • Make some kind of moral judgment about that issue
  • Establish an intention to act upon that judgment
  • Finally actually act according to their intentions

Jones (1991) suggests that these stages are intended to be conceptually distinct, such that although one might reach one stage in the model, this does not mean that one will necessarily move onto the next stage. The model distinguishes between knowing what the right thing to do and actually doing something about it, or between wanting to do the right thing, and actually knowing what the best course of action is. For example, even though a salesperson might know that lying to customers is wrong (moral judgement), for one or another reason (needing to meet the sales targets), they might not actually always tell the truth (moral behaviour).

I have recognized that the company is faking its environmental positive image and now my conflict in this issue is between my job and my conscience. However, at the moment, I believe I will maintain what is called by Birds and Waters (1989) ‘moral muteness’. Bird and Waters (1989) in their research found that managers avoid moral talk for diverse reasons. More specifically, managers are concerned that moral talk will threaten organizational harmony, organizational efficiency, and their own reputation for power and effectiveness.

For the short-term I will continue with my job but indirectly keep hinting my employer about the things which are unethical and are bothering me. If this doesn’t work, I might warn the company that in case this information leaks out, the company can get embroiled in a bitter legal lawsuit. Overall, my continued employment in the company will be shaky as I would not want to endanger my own reputation of promoting fake image for the company and ruining my career forever should the news about the company’s mining practices break out. Of course, budgets also stand to be changed and actual expenditure might be different. Perhaps, politicians might NOT grant them rights to mine in national parks. If the practices improve, I would be happy to continue with my job; else I would quit.

 

 

 


Reference:

Bird, F. and Waters, J. (1989), “The Moral Muteness of Managers”, California Management Review, Vol. 32, pp. 73-88

 

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