Question

You are employed as a section manager for Gadgets & Gizmos, Inc. As part of your duties, you are required to help prepare a budgeted income statement for the section before the new fiscal year begins. You know that after the close of each fiscal year's financial reports, managers are awarded incentive bonuses. The incentive bonuses are directly based upon the excess of actual income achieved by their section over budgeted income for that fiscal period.

Tell us (a) about an ethical conflict that you might have while assisting with the budget preparation, and (b) how the outcome of that ethical conflict could ultimately do harm to employees, customers or the company as a whole.

Answer 1

a.The ethical conflict here may include intentional budgetary slack where some of the managers create the budget by overestimating the expenses and underestimating the projected income. When the managers inflate the budget, it becomes easy for them to complete the process within the budget as the budgeted amount is high. The income would be high compared to the budgeted income as there are no significant expenses as proposed in the budget. These managers would be awarded with incentive bonuses. The managers who honestly prepared the budget may not be able to establish their performance as the performance depends on the excess of actual income over budgeted income for that fiscal period. Achieving the same may be difficult as the budget is presented with the correct numbers. If the managers have not used budgetary slack, but still performed well to reach the results within budget, the efforts are not getting recognized due to the connection between budget and the performance.

b. The outcome of this kind of ethical conflict can be lack of employee motivation and commitment and other employees also would practice budgetary slack to ensure their success. This will lead to significant problems to the company and the company would need to cut the expenses on critical operations which may affect the quality of product or service provided by Gadgets & Gizmos, Inc which in turn affects the employees, customers and the company as a whole.