Johnson Wheels, Inc.

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1. Johnson Wheels, Inc. is a company that manufactures wheels for suitcases, skateboards, plastic tote carts, and other products that require small, flexible wheels. Because of new, durable plastic products from other companies, however, sales have been decreasing. The revenue Johnson reports has been down, and investors are nervous. As Johnson’s CFO is working on the annual financials, he has a discussion with his chief of audit about changing Johnson’s depreciation formulas. “With less depreciation, our numbers look better. I think we can increase the life of many of our production machines. Let’s recalculate adding two years and see what depreciation looks like.” The chief of audit is concerned about the change, saying, “Maybe it’s justified. You could argue either way.” Discuss the ethical issue here and what ethical schools of thought in business might apply.
2.
While the CFO and chief of audit are dealing with the depreciation issue, Johnson’s head of production has a proposal for Johnson’s CEO: “I have a new plastic that we could switch to. The customers will like it because it has a wider range of colors, but it wears out more quickly, so we could sell more wheels.” Help the CEO analyze the ethical issues with this decision.

3.Johnson’s CFO went ahead with the depreciation adjustment. The following year, the CFO and the chief of audit were discussing Johnson’s still declining sales and revenues and their first quarter financials. The CFO proposes the following: “Look, we’re coming up on the spring season when the skateboard wheels peak. Why don’t we just ship the wheels early to our regular customer and we can have a second quarter peak instead of waiting for the third quarter.” The chief of audit responds, “Well, if the customer has not ordered the wheels, I am not sure we have a sale to book.” The CFO then explains, “We can make it part of a special promotion and make the credit terms favorable.” The chief of audit worries, “It feels like we are piecing together sales and revenues and not really meeting our numbers.” Help the chief of audit discuss his concerns with the CFO.

4.When the CFO and chief of audit meet to discuss the third-quarter earnings, the CFO tells the chief of audit, “Just make some top-entry adjustments so that our sales are just flat. We can see this through, and these are only temporary adjustments.” The chief of audit does not want to make the adjustments, but the CFO is his boss. The chief of audit thinks, “I have seen him fire people for raising questions. If I say no, he will just get someone else to do it and fire me anyway. He was named CFO of the year last year by Business Perspectives. He has a great track record, even before he came to Johnson. I can’t question him.” Discuss what is happening with the CFO and in this situation.

 

Sample Solution

Ethical Issues at Johnson Wheels, Inc.

1. Depreciation Change:

  • Ethical Issue: Manipulating financial statements to mislead investors.
  • Ethical Schools:
    • Utilitarianism: Focuses on maximizing overall good. Changing depreciation might benefit investors in the short term, but it could ultimately damage the company’s reputation if discovered.
    • Deontological Ethics: Focuses on following moral principles regardless of consequences. This principle suggests it’s wrong to manipulate financials.

2. New Plastic Proposal:

  • Ethical Issue: Prioritizing short-term sales over product quality and customer trust.
  • Ethical Schools:
    • Stakeholder Theory: Considers the interests of all stakeholders (customers, employees, investors). This proposal might benefit investors but could harm customer satisfaction and brand reputation.
    • Virtue Ethics: Focuses on building good character traits. This decision could erode honesty and integrity within the company.

3. Early Shipment and “Sales Piecing”:

  • Ethical Issue: Inflating sales figures through potentially deceptive practices.
  • Ethical Schools:
    • Kantian Ethics: Focuses on universal principles and acting in a way you’d want everyone to act. This practice might create a dishonest precedent in the company.
    • Social Contract Theory: Business operates within a social contract to act ethically. Manipulating sales figures could undermine this trust.

4. Top-Entry Adjustments and Pressure:

  • Ethical Issue: CFO pressuring the chief audit to manipulate financial statements.
  • Ethical Schools:
    • Whistleblower Protection: Chief audit might have a responsibility to report potential fraud.
    • Professional Ethics: Accountants have a code of ethics requiring honest reporting.
  • The CFO’s behavior: This could indicate a pattern of unethical financial management to maintain a good reputation, potentially jeopardizing the company’s future.

Recommendations for the Chief Audit:

  • Document Everything: Keep records of conversations and calculations to support potential future actions.
  • Seek Guidance: Consult with an independent ethics advisor or professional organization for guidance on how to proceed.
  • Consider Reporting Upward: If comfortable, escalate the issue to a higher authority within the company (board of directors) if the CFO is unresponsive.
  • Consider Leaving and Reporting Outward: If the pressure is significant, consider resigning and reporting the situation to regulatory bodies or whistleblowing hotlines.

This situation presents a serious ethical dilemma for the chief audit. They have a responsibility to uphold ethical accounting practices and protect the company’s long-term well-being. The consequences of inaction could be severe, so seeking external advice and exploring reporting options might be necessary.

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