ETHICAL ISSUES
Emily Thibauld, controller of an oil exploration division, has just been approached by Tim Wilson, the divisional manager. Tim told Emily that the projected quarterly profits were unacceptable and that expenses need to be reduced. He suggested that a clean and easy way to reduce expenses would be to assign the exploration and drilling costs of four dry holes to those of two successful holes. The costs could then be capitalized and not expensed, reducing the costs that needed to be recognized for the quarter. He further argued that the treatment would be reasonable because the exploration and drilling all occurred in the same field; thus, the unsuccessful efforts really were the costs of identifying the successful holes. ‘‘Besides,'' he argued, ‘‘even if the treatment is wrong, it can be corrected in the annual financial statements. Next quarter's revenues will be more and can absorb any reversal without causing any severe damage to that quarter's profits. It's this quarter's profits that need some help.'' Emily is uncomfortable with the request because generally accepted accounting principles do not sanction the type of accounting measures proposed by Tim.
Required:
1. Using the CMA Code of Professional Ethics for management accountants, recommend the approach that Emily should take.
2. Suppose Tim insists that his suggested accounting treatment be implemented. What should Emily do?