Does IMA's Code of Conduct Apply to Other Functions?

UNITED FOREST PRODUCTS (UFP) [*] IS A $1 BILLION

North American corporation with many large timber and wood processing plants. The company is decentralized into divisions that operate as profit centers. The majority of the centers are evaluated on cost control and the achievement of

Recently, UFP decided to hire degreed and professionally certified persons as division controllers to implement and operate its integrated budget and performance evaluation system (BPES). Amy Kimbell was hired as controller of the Allegheny Division shortly after the BPES was adopted. Over the past six months, she reviewed the division's performance several times with William Jefferson, the division manager. It became apparent that the division wouldn't meet its targeted goals unless drastic changes were made.

Unfortunately, when UFP management established BPES, it didn't recognize that several vertically integrated divisions don't have external markets for their products but are forced to sell internally. The Allegheny Division is actually a cost center that's forced to use a nonmarket-based transfer price but is evaluated as a profit center. Jefferson realized this problem and told Kimbell the only way to meet budget was "to maximize output and make some serious changes in our cost control." Shortly thereafter, Kimbell noted a dramatic increase in division profitability.

Through study of monthly profit and loss details, Kimbell noted a slight increase in output and a significant decrease in the purchase cost of raw timber. She knew her responsibilities required her to understand fully how this sudden change was taking place. Since she was new to the forest products industry, she took every opportunity to explore all parts of the operation and became acquainted with employees in all operating units at the plant.

One day when she was at the log yard where timber is received and scaled to determine its price, she noted that a trucker-timber contractor was quite aggravated when he was given the scale report (board feet and quality). When she asked one of the younger scaler employees what was bothering the contractor, he said, "Are you kidding? You wouldn't believe how much we've been knocking these guys down on scale the last three months!" Further conversations revealed that Jefferson had apparently told the division's mill scalers to accomplish significant reductions in both the size scale (in inches of log diameter) and quality measures of logs sold to the mill. The impact has been a significant reduction in the price paid to contractors for timber purchased by the division.

Amy Kimbell surmises that her boss, the division manager, has committed an unethical act by causing employees to deliberately give logging contractors arbitrary and inaccurate "low-ball" evaluations of raw material quantity and quality. This reduces raw material costs, enabling the division to meet its profit target so that profit sharing can be paid. Although she has no direct part in this activity, she's unsure what actions, if any, she should take to comply with the IMA Code of Professional Conduct. She's particularly concerned about the Code provision that states:

"Practitioners of management accounting and financial management shall not commit acts contrary to these standards nor shall they condone the commission of such acts by others within their organizations."

Amy is unsure about what she should do to avoid condoning the purchasing practices that she believes are unethical. This ethics dilemma poses these questions:

1. What is an IMA member's obligation (to act) when others within his or her organization who aren't "practitioners of management accounting and financial management" commit an act contrary to the IMA ethics standard?

2. Does the language "...nor shall they condone..." project the qualitative attributes of the IMA Code of Conduct beyond the boundaries of the finance function to others within the organization? Is this appropriate?

3. Does the IMA Code of Conduct need clarification on this point?

The IMA Ethics Committee is very interested in learning how readers view the ethical dilemmas their fellow members face. Please mail your comments to: Strategic Finance, 10 Paragon Drive, Montvale, NJ 07645 or by e-mail to ethics@imanet.org.

Roland L. Madison, Ph.D., CPA, is the KPMG LLP Professor of Accountancy at John Carroll University, Cleveland, Ohio.

(*.) All names are fictitious, and certain facts have been changed to maintain confidentiality.