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

1. 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?
2. 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.