Question

A friend comes to you with the following problem. “I provided my boss a cost equation using regression analysis. He was unhappy with the results. He told me to do more work and not return until I had a lower cost estimate for one of the variables—the number of machine-hours. My initial analysis covered the last 36 months (proving 36 observations). By dropping four months in which the relation between costs and machine-hours was very high, I was able to get a lower cost estimate for machine-hours. My boss was happy with my new results. Do you think that what I did was unethical?” How would you respond?

Answer 1

Yes, the action performed by the friend was unethical. By dropping the 4 highest month of usage on the machine in relation to cost vs machine hours we are intentionally under estimating costs. When we under estimate cost we overstate profits, which is mis leading and unethical. Under SOX and GAAP we are to create reliable financial statements that are accurate, not misleading, and free from fraud. In this case the friend is committing an act of fraud, this resulting in an unethical act.