Range-Tout SARL builds and distributes industrial storage racks using a just-in-time system and maintaining minimal stocks. Range-Tout’s earnings increased sharply in 2007 and earnings-based bonuses were paid to the management staff for the first time in several years. Nathalie Carotte, Range-Tout’s president, wants earnings to continue growing, even to the point that the 2008 bonuses would be double those of 2007.
Albert Capus, Range-Tout’s vice-president of finance, met with Boris Carême of Génie du Bois SA, a primary vendor of Range-Tout’s manufacturing supplies and equipment. Capus asked Carême to invoice all of Range-Tout’s 2005 purchases (€2 million in equipment and €3 million in supplies) as equipment. The reason Capus gave for his request was that Range-Tout’s president had imposed stringent budget constraints on operating costs but not on capital expenditures. Carême agreed to do as Capus asked. Range-Tout expenses all supplies purchases immediately. It depreciates equipment on a straight-line basis over 10 years, assuming a zero disposal price. While analysing the second-quarter financial statements, Jules Ballès, Range-Tout’s financial controller, noticed that only equipment and no supplies had been purchased from Génie du Bois. Ballès, who reported to Capus, immediately brought this matter to Capus’s attention. Capus told Ballès of President Carotte’s high expectations and of the arrangement made with Boris Carême of Génie du Bois. Ballès requested that he be allowed to correct the accounts and urged that the arrangement with Génie du Bois be discontinued. Capus refused and told Ballès not to become involved in the Génie du Bois arrangement. After thinking about the matter for a while, Ballès arranged to meet with Nathalie Carotte and he disclosed the arrangement Capus had made with Génie du Bois.
1. Calculate the effect on Range-Tout’s 2008 operating profit of showing supplies purchased in 2008 as equipment purchases. Do you agree with Jules Ballès, Range-Tout’s financial controller, that the supplies purchased from Génie du Bois SA were accounted for improperly? Explain your answer.
2. Refer to the discussion of professional ethics in the appendix to Chapter 1. Explain why the use of the alternative accounting method to manipulate reported earnings is unethical.
3. Without prejudice to your answers to requirements 1 and 2, assume that Albert Capus’s arrangement with Génie du Bois SA is not ethical in a professional sense. Discuss whether Ballès’s actions were appropriate.