Case Study One
Jay White is a CPA and a member of the AICPA. Jay works as an accounting manager at the division level at Smith Energy Company, a publicly owned company headquartered in North Carolina. Smith Energy is a state-regulated utility company that provides electricity to 4 million customers in northern states. Smith Energy is allowed a rate of return on operating income at a maximum of 13.0 percent on the electricity it sells. If the company is earning more than that, regulators can cut the rate that it charges to customers. Jay reports to Samantha Hulett, the controller of the division. Hulett holds the Certificate in Management Accounting (CMA) and is a member of the IMA. She reports to Don Lilly, the chief financial officer, who is a CPA. In turn, Lilly reports to Andrea Starns, the CEO of the company.
Lucy Laughs is the chief compliance officer. The company has an audit committee of three members, all of whom sit on the board of directors. Jay has identified irregular accounting entries dealing with the reclassification of some accounting items to make its returns lower, so state regulators would not cut rates. One example is that Smith Energy often gets rebates from insurers of its nuclear plants based on safety records. Although the cost of the premiums is expensed to the electricity business, the rebates–approximately $26 million to $30.5 million each–were not booked back to the same accounts. On a number of occasions, they were booked below operating income in a non-operating account. The moves kept Smith Energy from exceeding its allowable returns and kept the states from reducing electricity rates. After two years of being silent, Jay decided it was time to address the issue.
The IMA Committee on Ethics encourages organizations and individuals to adopt, promote, and execute business practices consistent with high ethical standards, by providing valuable insight in response to the changing profession. Review the IMA website and Statement of Ethical Professional Practice.
To give you a framework for answering the following questions access the IMA Code of Ethics here: http://www.imanet.org/resources-publications/ethics-center
Questions
What steps should Jay take to ensure that the accounting matter is adequately addressed by the company? Why do you suggest those steps be taken? What are the ethical obligations of the other parties mentioned?
Assume that Jay made a strong case that the accounting did not comply with GAAP, but his superiors said that the decisions already made were final. They never offered an explanation. What would you do next if you were Jay? Would you blow the whistle and, if so, how would you do it? Explain your answer in terms of ethical reasoning.
