Principles of Accounting
The Ethical Dilemma at Cheap Chips Corporation
Introduction to Cheap Chips, Palm Oil, and the Platte River
Cheap Chips Corporation (CCC) is a manufacturer of low-cost flavored potato chips targeting low-income families in urban and rural centers in the Western regions of the United States. The company produces its chips in a factory located on the banks of the Platte river outside Greeley, Colorado, and sells them to various small distributors in nearby states. The company has produced high levels of profitability during last few decades due to its use of low-cost inputs and minimum wage employees and staff. Cost control is a key strategic goal of the company, with its unofficial corporate motto being “think big, but always think cheap”.
In order to live up to its name, the company packages its products as cheaply as possible, using a mixture of low-grade polypropylene plastic and palm oil. However, a few years ago, the company’s environmental manager helped to design a new type of chip packet, that used 100% recycled polypropylene, water-based ink, and non-palm oil-based vegetable oil. However, certain consumers complained that the new packaging was “too noisy” to handle during movie watching, left color stains on their fingers, and felt “greasy” to the touch. As a result of this feedback, the company reverted to using its classic “smooth” and less “crackly” style packaging, that utilized 100% virgin plastic, chemical solvents, and palm oil.
Despite this setback, the environmental manager obtained approval to extend the company’s International Organisation for Standardisation (ISO) approved ISO 9001 quality management system and implement a new ISO 14001 environmental management system (EMS) to help manage the factory’s environmental impacts and costs. However, since the implementation of the EMS, environmental information has not been used within senior management decision making, with the data seen as a mere public relations tool to appease a vocal minority of ‘green-minded’ consumers. In addition, as the company’s two largest customers, BeerEats and Special Stores, simply desire a secure supply of low-cost potato chips, sustainability and environmental issues have traditionally been low down on CCC’s list of corporate imperatives.
However, in recent months Cheap Chips has received a larger volume of social media contacts from consumers concerned about the company’s use of palm-oil based packaging. These customers are urging the company to use recycled polypropylene and sustainable sources of palm oil. Additionally, local environmental groups have lobbied Colorado policymakers for increased environmental regulation to protect the Platte River and its tributaries from habitual polluters.
For many years, Cheap Chips has been dumping emissions from its Greeley factory directly into the river, effectively using it as a free effluent disposal system. Although this activity has long gone unnoticed, the Federal Clean Water Act of 1977, Colorado Regulation #85 of 2012, and other water quality regulations all require manufacturing entities to take responsibility for any emissions to the water supply. Furthermore, the Colorado Governor has sponsored state-legislation to reduce river pollution by forcing local manufacturers to install “state of the art” effluent-filtering and monitoring equipment.
The proposed state-based legislation is still being debated but would penalize companies that show any evidence of dumping palm-oil effluent into local rivers. The senior management of Cheap Chips is concerned about the proposed legislation and has prepared a report about the economic costs of compliance, and the impact it may have on the company and local economy.
What is Palm Oil?
Palm oil is the most widely consumed and versatile vegetable oil, and it is in about half of all packaged products sold in grocery stores. While palm oil is the most efficient source of vegetable oil, expansion in its use threatens some of the planet’s most important and sensitive wildlife habitats. Palm oil grows in tropical rainforests and the uncontrolled clearing of these forests for conventional palm oil plantations has led to widespread loss of these irreplaceable and biodiverse rich forests. Plantations have also been connected to the destruction of habitat of endangered species, most especially orangutans, tigers, elephants and rhinos. In addition, there are number of reports of human rights violations on these plantations.
Many products that use palm oil are not clearly labeled as doing so. Palm oil and its derivatives are typically described as: Vegetable Oil, Vegetable Fat, Palm Kernel, Palm Kernel Oil, Palm Fruit Oil, Palmate, Palmolein, Glyceryl, Stearate, Stearic Acid, Elaeis Guineensis, Pamitirc Acid, Palm Stearine, Palmitoyl Oxostearamide, Palmitoyl Tetrapeptide-3, Sodium Laureth Sulfate, Sodium Lauryl Sulfate, Sodium Kernelate, Sodium Palm Kernelate, Sodium Lauryl Lactylate/Suphate, Hyrated Palm Glycerides, Etyl Palmitate, Octyl Palmitate, Palmityl Alcohol.
The Ethical issue at Cheap Chips
In response to the planned Colorado state environmental legislation, company representatives have prepared a report entitled “The Colorado food industry: economic growth versus environmental impacts” which highlights the impact that the new regulation will have on Colorado-based food companies. Deli Smith, the Company President, is due to present this report to the State Environmental Committee in Denver next week.
The case opens with Stuart Webber, the company’s Finance Director, discussing the company’s environmental impact report with Daniel Farke, the Head Accountant.
“I thought we understood each other Daniel. I can’t believe that you are threatening to go public with your statements about this report. You’re about to damage all the important things in your life: your career, your friendships and your company!”
After thinking for a moment, Daniel offered a reply:
“I’m sorry, Stuart. I know how much this means to you, but I don’t think I have a choice in this matter. I can’t sit by while we allow this report to be presented to the State Environmental Committee. We both know that these numbers have no foundation, as pollution filters and the other equipment needed will not cost that much to fit and maintain.”
Stuart continued his line of argument:
“Well, Daniel, this type of opinion may be a problem, a big problem. I will get Deli, and we will see what she thinks about your opinion. She is my boss, so let’s see what she has to say.”
As Daniel waited for Stuart to return with Deli, he thought about his twenty years working at Cheap Chips. Daniel started working at the firm after emigrating to the USA from the UK. He relocated to the US to marry his partner and struggled to find a job as a non-US citizen. In fact, Cheap Chips was the only firm that would hire him, as the factory handyman. After injuring his leg after falling from a ladder, Daniel was transferred to a desk job in the accounting office. While an accounting clerk’s salary was low, his talent for financial analysis brought him to the attention of senior management. The company paid his university tuition fees and gave him time-off to complete his Institute of Management Accountants (IMA) and UK Chartered Institute of Management Accountants (CIMA) certifications. He won a CIMA award for his exam performance and, was recently promoted to Head Accountant. With three children, a wife and a large mortgage, Daniel was grateful for his promotion. Although this position meant more pay and a new challenge, it also removed him from day-to-day financial analysis and operating decision-making.
The office door opened, and Stuart entered with Deli Smith, the Company President. Mrs. Smith had worked for the company for thirty years and had a solid reputation in the U.S. food industry. Deli’s shrieking and pompous voice broke the silence.
“What’s your issue, Daniel? Stuart tells me that you have some concerns about the report we submitted to the State Environmental Committee.”
Daniel thought for a moment and then replied:
“Well, I think we, ‘the company’, have some major issues here. Firstly, the report to the State Committee has my name on it, but I didn’t prepare any of the figures or estimates within it. I cannot associate myself with such a report, especially as it appears to include inaccurate information. For example, where is the information from our ISO 140001 EMS? The system provides details about the amount of effluent we generate, and the environmental manager can assist us in providing cost estimates for the new filtration technology – did you ask him for information? Where exactly did this information come from, and who authored the document? Furthermore, even if we ignored the effluent and cost data from our specialized ISO 14001 EMS, shouldn’t our existing ISO 9001 quality management system provide us with at least some data about our product waste levels, and monitoring and regulatory compliance costs?
As currently written, our report indicates that the company will experience financial problems if it is forced to install additional effluent monitoring and filtering equipment. It even concludes that we will be pushed into bankruptcy if the new regulation is implemented. Quite honestly, I know that these cost estimates are a joke, and artificially inflate the actual price of the required technology. There’s no way that our operating costs will increase by 120% if the proposed regulation is implemented. The report’s author simply ignored the information provided by our ISO 9001 and 14001 management systems, and either guessed at the environmental costs involved or tried to provide a biased account of the financial impact of the legislation.
To my knowledge, despite the implementation of our ISO 14001 EMS, senior management has never attempted to systematically manage emission or environmental costs. When these figures are presented to State Environmental Committee, someone must testify under oath as to the truthfulness of this report, and it is a pack of inaccuracies. The cost estimates are far too high. The report even estimates that the total US market for potato chips will fall by 15% per year as consumers are no longer home as a result of the COVID-19 pandemic. However, our own internal managerial forecasts suggest that industry revenue will actually rise by 20% per year as the entertainment sector rebounds and national demand for chips increases.”
Deli quickly responded to Daniel’s emotional outburst:
“Slow down, my dear, we have to use different figures for different purposes you know. When we report to our stockholders, we give them numbers that are substantially altered from our internal documents, right? In this case, we must ensure that sure those “wonderful and caring” individuals in the state government see the damage that the regulation may cause our industry. Besides, they already know we’re going to inflate and bias the numbers a “tiny” bit. Everyone does it, and it is part and parcel of doing business in modern America. There is nothing unethical at any of this.”
Daniel could not believe what he was hearing:
“But this isn’t simply a matter of presenting the figures differently according to who the end user is. These numbers are fabricated, misleading, and fail to account for the damage that we’re doing to the river and local wildlife. I talked to our production engineer a week ago, and he assures me that the palm-oil stuff we are dumping into the river has already been eliminated from our competitor’s products. The local community is effectively drinking our effluent. We are going to be subject to lawsuits if they ever trace it back to us – we should account for this liability, not ignore it. Furthermore, customers are now requiring that food suppliers report on their environmental impacts by producing sustainability or integrated reports. In the UK, this is becoming a routine part of the annual reporting process by both private and public companies, why not in Greeley, Colorado?
I think our approach to this issue is strategically short-sighted, and clearly distorts and misuses the internal information available to us. We have to think about our external environment, customers, competitors and other stakeholders. We clearly don’t consider our stakeholders or the environment, since we don’t even try to use recycled packaging and sustainable sources of palm oil.
Deli held up her hands in exasperation at Daniel’s comments, and angrily replied:
“What total rubbish, we are in the USA, and if you care about what UK companies report on, move back there. Our mission is to produce our products at the lowest possible cost. This strategy has worked successfully for many years, and no ‘hippie’ environmentalist is going to change things now. Environmental protection costs us “big” money I don’t want to waste. According to the figures within our report, this idiotic new legislation will increase product costs and force us to raise prices. In addition, we are also dealing with the impact of COVID-19. That is the situation reflected in our report, and there is nothing more to say about it. Accounting figures never lie, and simply reflect and report the true reality of things”.
Daniel was astonished by Deli’s response:
“Our competitors have invested in new technology and use raw materials that reduce effluent levels. Price and cost are not the only factors we need to consider when designing and manufacturing our products. Quality levels are increasing across the industry, but we don’t even try to measure strategic issues, such as product quality or customer satisfaction. Many customers may actually pay more for ‘green’ products, and government clients expect a ‘greener’ product at no extra cost. Our strategy is out of date and our financial analysis and management accounting systems should be telling us this. Being ‘greener’ could reduce cost and attract customers, but our report overlooks this. We should change our figures, or we could ultimately face legal action from supplying misleading information under oath. If we do face legal action, you could go to jail, and I could get my professional accounting certification revoked. As a member of a professional accounting body, I must adhere to a professional Code of Ethics you know.”
The mention of legal action made the President extremely angry:
“We’ll cross that bridge when we come to it. You’ve got to remember what is at stake here. Denver depends on our company. It’s your buddies you’d be threatening to put out of work, Daniel. This legislation may not bankrupt us, but it will certainly put a squeeze on profits. If profits are gone, there will be no more bonuses. Lower profits will also prevent us from investing in new production machinery for our plants.”
The President poured herself a glass of water, and continued:
“The bottom line is this, Daniel, my dear. You’re an important part of our team – we’ve invested a lot in you. Stuart was talking about promoting you into a new role with an increased salary. We’d hate to let you go because of this issue. In addition, aren’t you still just a resident alien? You may need our help to support your application for U.S. citizenship, so don’t mess things up. Sign this version of the report, and we will send it to the State Environmental Committee. You could even represent us at the State Committee hearing, as your IMA and CIMA certifications will lend extra credibility to your testimony.
We need to have everyone working toward the same goals, especially with the various market pressures we face. In addition, Stuart tells me that this isn’t even your area of responsibility. If you hadn’t picked up a copy of the report from my desk, you wouldn’t be involved apart from having your name on the front cover. Take the rest of the day off and spend some time with your family. Take them swimming in the river near our factory and relax. Think this through and I’m sure you will see the long-term benefit of our strategy. With everyone presently focused on dealing with COVID-19, this pollution problem is just a passing phase in society. Besides, we’ve had the problem for as far back as I can remember. A few extra years won’t hurt. The planet can cope, and our major customers don’t care about our environmental performance. My husband and I regularly take our children swimming in the Platte river, and the water has never been clearer in the private pool where we swim!”
Daniel thought for a full ten seconds before replying:
“Uh, ok, I think I understand your view. Let me go home and talk to my partner. See you tomorrow.”
“Thanks for being so reasonable and listening to Deli, Daniel”, replied Stuart Webber. “You know Deli is right – she is the reason for this company’s success, is well respected in the Colorado legislature, and will make this issue disappear. Let me get a job description, contract, and salary package together for your promotion, you can sign it tomorrow, along with our report to the Colorado State Environmental Committee. You know this all makes sense.”
[End of case information – see next page for detailed assignment requirements, references, submission guide, assessment criteria, and assessment rubric]
REQUIRED:
Using either the Statement of Ethical Professional Practice issued by the Institute of Management Accountants’ (IMA, 2017) or The Code of Ethics for Professional Accountants published by CIMA (2017), to produce a written memorandum that addresses the following issues:
⦁ Determine whether there is an ethical dilemma for Daniel in this scenario.
⦁ Identify the relevant stakeholders and state how they are impacted by the issue.
⦁ Within your answer apply the Code’s fundamental principles/standards to the case scenario and explain whether each is relevant for determining Daniel’s ethical position.
⦁ Briefly discuss the range of solutions that Daniel could use to resolve the situation according to the ethical conflict resolution guidance provided in IMA and/or CIMA and explain the most appropriate course she should adopt.
