Chapter 13, Problem 13.43ACT

Ethics involved with statement of cash flows preparation (Learning Objectives 1, 2, & 3)

The Green Giraffe Restaurant Group has 21 restaurants scattered across the midwestern portion of the United States. Green Giraffe is not publicly held but is owned by a small group of investors.

ETHICS

For years, the company has used the indirect method in preparing its statement of cash flows. Recently, it has come to the attention of a few of the investors that the statement of cash flows might be easier to understand and use if it were prepared using the direct method. At the quarterly meeting of the investors, they decide that the statement of cash flows for the Green Giraffe Restaurant Group should be prepared using the direct method.

Christopher Wargo is the controller for the Green Giraffe Restaurant Group. He graduated from college several years ago. He vaguely recalls learning about the direct method for preparing the statement of cash flows in college but has never used the method. Wargo is rather resentful that the investors are dictating accounting policy; he feels that the financial reporting that is currently done is adequate. Besides, even if the company reports using the direct method, a supplemental schedule of the indirect method will still need to be prepared. This change just seems to create extra work for Wargo. Wargo decides he’ll just do his best in preparing the statement using the direct method. He looks online and finds the Wikipedia page for the statement of cash flows and uses that model to prepare the statement. The company’s information system is not set up to collect data for the direct method at this time. The data can be obtained, but it will take several days. Wargo decides to just estimate the numbers that he’s missing rather than spend the time to get the correct numbers. He feels it is unlikely that the auditors will find these few numbers that he has plugged; after all, the totals will be correct. This shortcut he is taking will save him hours of work.

Requirements

1. 1. Using the IMA Statement of Ethical Professional Practice as an ethical framework, answer the following questions:
   1. a. What is(are) the ethical issue(s) in this situation?
   2. b. What are Wargo’s responsibilities as a management accountant?
2. 2. Discuss what Wargo should do in this situation. Refer to the IMA Statement of Ethical Professional Practice in your response.