Question

The director of marketing for Elephant Computer Co., Jennifer Highlight, had the following discussion with the company controller, Morey Tazwell, on July 26 of the current year:

Jennifer: Morey, it looks like I’m going to spend much less than indicated on my July budget.

Morey: I’m glad to hear it.

Jennifer: Well, I’m not so sure it’s good news. I’m concerned that the president will see that I’m under budget and reduce my budget in the future. The only reason that I look good is that we’ve delayed an advertising campaign. Once the campaign hits in September, I’m sure my actual expenditures will go up. You see, we are also having our sales convention in September. Having the advertising campaign and the convention at the same time is going to kill my September numbers.

Morey: I don’t think that’s anything to worry about. We all expect some variation in actual spending month to month. What’s really important is staying within the budgeted targets for the year. Does that look as if it’s going to be a problem?

Jennifer: I don’t think so, but just the same, I’d like to be on the safe side.

Morey: What do you mean?

Jennifer: Well, this is what I’d like to do. I want to pay the convention-related costs in advance this month. I’ll pay the hotel for room and convention space and purchase the airline tickets in advance. In this way, I can charge all these expenditures to July’s budget. This would cause my actual expenses to come close to budget for July. Moreover, when the big advertising campaign hits in September, I won’t have to worry about expenditures for the convention on my September budget as well. The convention costs will already be paid. Thus, my September expenses should be pretty close to budget.

Morey: I can’t tell you when to make your convention purchases, but I’m not too sure that September items should be expensed in July’s budget.

Jennifer: What’s the problem? It looks like “no harm, no foul” to me. I can’t see that there’s anything wrong with this—it’s just smart management.

Step 1 – Discuss your thoughts on just how Morey Tazwell should respond to Jennifer Highlight’s request to expense the advanced payments for convention-related costs against July’s budget? Your discussion should be at least 500 words. Be specific and reference material we have discussed or covered in this class to support your thoughts/suggestions. Also in your discussion, address the following as well….

1. Is this ethical?
2. Is this legal?
3. Would this be in accordance with GAAP?
4. If you were the company CFO and Morey came to you, what would you tell him to do?

Answer 1

In the given scenairo, the marketing director has not incurred enough expenses for the current month. The main reason for the same being a delay in the advertisement campaign. The campaign was supposed to happen in the present month of July but it has further delayed until september of this year. Also, in September month, a sales convention has been scheduled. This means that in September month, the total expenditure will be too high compared to the budgeted expense for September. It is in this case that Jennifer came up with the thought of booking the expenditure in advance during the month of July so that the budget and actuals for the month will match.

As we can see here, on an ethical side, this act seems to be wrong from the side of Jennifer. If she does make a payment in this way, no other person would get to know unless she communicate about this with the others.