Question

M. K. Gallant is president of Kranbrack Corporation, a company whose stock is traded on a national exchange. In a meeting with investment analysts at the beginning of the year, Gallant had predicted that the company's earnings would grow by 20 % this year. Unfortunately, sales have been less than expected for the year, and Gallant concluded within two weeks of the end of the fiscal year that it would be impossible to ultimately report an increase in earnings as large as predicted unless some drastic action was taken. Accordingly, Gallant has ordered that wherever possible, expenditures should be postponed to the new year-including canceling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-year advertising and travel. Additionally, Gallant ordered the company's controller to carefully scrutinize all costs that are currently classified as period costs and reclassify as many as possible as product costs. The company is expected to have substantial inventories of work in process and finished goods at the end of the year.
(b) Do you believe Gallant's actions are ethical? Why or why not'?

Answer 1

Gallant's actions are ethical. This statement can be argued upon because of the below-mentioned reasons.

As the president of a corporation, M.K Gallant will, of course, make any strategic plan available for his company in order to attract investors, customers, and even competitors.

In my opinion, his choices and decisions are ethical enough as to maintain the company's profitability.

Cost-cutting measures, such as deferring and canceling expenditures and orders, delaying maintenance and training, and reducing travel and advertising expenses, are rational if your company's sales are declining and it is expected that it will not meet its revenue targets for the year.

However, this is risky because

1. advertisements are extremely important in a company's marketing,
2. delaying orders from suppliers can cause problems within the company and its vendors because these are pre-ordered.
3. Maintenance and training are important aspects for a company because they can lead to bigger problems in the future.

Finally, cost reclassification is debatable.

Because stocks are traded in this case, we can expect an audit.

The auditors will examine the reclassifications to see if they implement accounting principles (GAAP). M.K Gallant and his controller must have legitimate reasons for reclassifying the company's costs.

Hence, Gallant's actions are ethical if he has valid reasons for doing so.

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