Conflict of Interest at Midland DairyBy
The IMA® Committee on Ethics and Raef Lawson, Ph.D., CMA, CPA, CFA, CFP, IMA VP of Research and Professor-in-Residence, are proud to announce that Herbert W. Snyder and Nancy Emerson, CPA, have won the Best Case Award in the 10th annual Carl Menconi Case Writing Competition for their case, “Conflict of Interest at Midland Dairy.” The competition is named in memory of Carl Menconi, who held leadership positions in IMA for many years and served as chair of the IMA Committee on Ethics. The objective of the competition is to develop and distribute business ethics cases with specific application to management accounting and finance issues and that use the IMA Statement of Ethical Professional Practice as a reference or guidance tool. The winning case and teaching notes are available for use in a classroom or business setting. IMA academic members can access and download the teaching notes from the Academic Teaching Notes library in LinkUp IMA (select “Teaching Notes (Academic Members)” from the “More” dropdown menu). Others who want to use the case and notes should contact Kerry Butkera at firstname.lastname@example.org.
DIANA PIERCE, a CMA® (Certified Management Accountant) and CPA (Certified Public Accountant), works as a staff accountant at Midland Dairy Products, a privately held wholesaler. As its name suggests, the company distributes a variety of dairy products to commercial and institutional consumers. These include manufacturers, educational institutions, state and municipal agencies, and nonprofit organizations.
Diana has worked at Midland for eight years, and her current job duties include overseeing the accounting for the manufacture of a variety of distributed product lines, including the company’s standard and premium yogurts.
As is common for many accounting professionals, Diana was asked to become a member of a state nonprofit board. The organization, Parent Helper, administers a statewide childcare network for the children of working parents. In addition to standard childcare, Parent Helper provides food supplements for needy students through a program sponsored by a state agency.
Diana’s job duties as a board member require her to review Parent Helper’s documentation for the state nutrition program. To do so, she scheduled a meeting with Maria Stapleton, the office manager with Parent Helper, to discuss the program. Here’s the conversation they had:
Diana: Thanks for meeting with me. Can you explain to me how you go about getting reimbursed under the state food program?
Maria: Well, we don’t really get reimbursed, which is one of the nice things about the program. The centers are certified by the state, and then we sign on with local food distributors. We send them our weekly requests for whatever food the centers need, and they invoice the state directly for payment.
Diana: That’s certainly easy for the centers, but doesn’t anyone ever check to see what you actually use?
Maria: The state doesn’t, but some of the distributors we work with do. Our contracts specify we have to let them review the records for the products we consume. Actually, we do business with Midland, although they never send anyone. You people have the best yogurt. The kids really love the mixed fruit.
When Diana returned to work the next morning, she was curious about the contractual arrangements between Parent Helper and Midland. How the state decided to fund its programs wasn’t really her problem, but she was curious whether they relied only on the word of suppliers to issue payments.
Diana’s area is manufacturing, but sales of the yogurt her group produces are actually under the control of Tom Harrold, her supervisor and Midland’s CFO. The invoices Midland sends to the state are available to any Midland accountant. That morning, Diana pulled up the most recent one.
Much to her surprise, the invoice listed that 80 cases of Midland’s premium Greek yogurt had been shipped to Parent Helper rather than the standard yogurt she’d seen in their files. “This must be an error,” she thought and pulled up invoices for the last six months.
It wasn’t an error, however. All of the invoices for the prior six months were for the more expensive yogurt. Diana downloaded the entire file for the program and returned to Parent Helper that evening to compare the two sets of invoices.
It appeared that, barring the first months on the contract, the state had been billed for the more expensive product although Parent Helper continued to receive the cheaper standard yogurt. The difference is significant. Premium yogurt is priced at almost double the cost of regular yogurt. The Parent Helper center is a large consumer—over the course of the contract, the difference amounted to more than $40,000.
Dismayed at what she had uncovered, Diana organized her materials and made an appointment to speak with Tom Harrold. Here’s their conversation:
Tom: I looked over the materials you sent me, and frankly I would agree that we have a serious problem here.
Diana: I’m so relieved you agree; this has been bothering me for days. What do you think we should do?
Tom: We? I don’t think we have a problem, but you do. I’m seriously concerned about your membership on the board of an agency we do business with. Haven’t you ever bothered to look over the conflict of interest policy we have? You may be putting your career in jeopardy.
Diana: Sorry? I don’t understand.
Tom: Let me be clear. We do business with Parent Helper. You can’t be a member of their board. It’s the first time we’ve ever had this come up with you, so if you tender your resignation from the Parent Helper board immediately, I’ll let it pass.
Diana: Of course I don’t want to violate any company policies, but what about the yogurt?
Tom: What about it?
Diana: The invoices don’t match. We seem to be charging the state for something we aren’t giving to Parent Helper.
Tom: Nonsense. I handle the account myself, and I assure you, you’re wrong. Nothing gets paid for that we aren’t delivering. This is why we have the conflict of interest policy. People like you get confused about where they work and what they’re doing. Now leave the Parent Helper account to me and have a copy of your board resignation letter on my desk by the end of the day. Anything else?
Diana: I…I guess not. I’ll get right on it.
Tom: Good. Let’s get this taken care of, and we won’t need to deal with the matter further. You’re an excellent employee, and I’d hate to see something like this sidetrack your career.
After the meeting, Diana went back to her office. She placed a call to Midland’s human resource office to see whether the company had any specific guidance concerning the issues she was dealing with. She was informed that the company did have a conflict of interest policy (see “Midland Dairy Products Conflict of Interest Policy” on p. 50), but otherwise had no comprehensive ethics policy.
She began writing her letter of resignation from Parent Helper but couldn’t concentrate. The situation didn’t seem to be resolved, but she was at a loss for what to do.
- What is a conflict of interest in the workplace? What is the purpose of a conflict of interest policy? What basic responsibilities does Midland’s policy contain, and to whom do they apply?
- After reviewing Midland’s policy concerning conflicts of interest (see below), do you agree with Tom Harrold that Diana violated the policy? Why or why not? What steps should Diana have taken to avoid a potential conflict?
- Examine the IMA Statement of Ethical Professional Practice (see below). As a CMA, has Diana acted properly from an ethical and professional standpoint so far? Be specific in your response, and be prepared to justify it based on the Statement.
- Diana holds both CMA and CPA certifications. Compare the IMA Statement of Ethical Professional Practice with the AICPA Code of Professional Conduct. What differences do you find between the two? Would these differences have any effect on how Diana would handle her current situation?
- Imagine that you are in Diana’s situation. What options are open to you? Which of the options should you follow and why? What are the likely outcomes for you personally if you pursue the option that you selected? What is likely to happen if you decide not to follow the option?
MIDLAND DAIRY PRODUCTS CONFLICT OF INTEREST POLICY
SECTION 1. PURPOSE:
There exists between Midland’s board, officers, management, employees, and the public a duty to administer the affairs of Midland honestly and prudently and to exercise their best care, skill, and judgment for the sole benefit of Midland.
As a Midland employee, you are expected to act at all times in the Company’s best interests and to exercise sound judgment unclouded by personal interests or divided loyalties. Both in performing your duties at Midland and in your outside activities, you should avoid the appearance as well as the reality of a conflict of interest.
SECTION 2. PERSONS CONCERNED:
This statement is directed to all board members, officers, management, and employees who can influence the actions of Midland. For example, this would include all who make purchasing decisions, all persons who might be described as “management personnel,” and anyone who has proprietary information concerning Midland.
SECTION 3. CONFLICT OF INTEREST DEFINED:
A conflict of interest exists if your circumstances would lead a reasonable person to question whether you had a personal or private interest sufficient to appear to influence whether your decisions were made in the best interests of Midland. Note that this requires avoiding both actual conflicts of interest and actions that give the appearance of conflicts of interest. Such conflicts may exist even in a case where no monetary interest or gain is involved.
SECTION 4. NATURE OF CONFLICTING INTEREST:
A conflicting interest may be defined as an interest, direct or indirect, with any persons or firms that create the situations described in Section 3. Such an interest might arise through:
- Owning stock or holding debt or other proprietary interests in any third party dealing with Midland.
- Holding office, serving on the board, participating in management, or being otherwise employed (or formerly employed) with any third party dealing with Midland, including but not limited to nonprofit organizations.
- Receiving remuneration for services with respect to individual transactions involving Midland.
- Using Midland’s time, personnel, equipment, supplies, or goodwill for other than Midland-approved activities, programs, and purposes.
- Receiving personal gifts or loans from third parties dealing or competing with Midland. Receipt of any gift is disapproved except gifts of a value less than $50, which could not be refused without discourtesy. No personal gift of money should ever be accepted.
- Family and romantic relationships.
- Spouses, domestic partners, immediate family members, or relatives as suppliers, vendors, and other business partners.
- Kickbacks and rebates by suppliers or vendors.
SECTION 5. INTERPRETATION OF THIS STATEMENT OF POLICY:
The nature of conflicting interest described in Section 3 and the relations in those areas that may give rise to conflict, as listed in Section 4, are not exhaustive. Conflicts might arise in other areas or through other relations. It is assumed that the directors, officers, management, and employees will recognize such areas and relation by analogy.
The fact that one of the interests described in Section 4 exists does not necessarily mean that a conflict exists; or that the conflict, if it exists, is material enough to be of practical importance; or, if material, that upon full disclosure of all relevant facts and circumstances it is necessarily adverse to the interests of Midland.
However, it is the policy of the board that the existence of any of the interests described in Section 4 shall be disclosed before any transaction is consummated. It shall be the continuing responsibility of the board, officers, management, and employees to scrutinize their transactions and outside business interests and relationships for potential conflicts and to make such disclosures immediately.
SECTION 6. DISCLOSURE POLICY AND PROCEDURE:
Transactions with parties with whom a conflicting interest exists may be undertaken only if all of the following are observed:
- The conflicting interest is fully disclosed;
- The person with the conflict of interest is excluded from the discussion and approval of such transaction;
- A competitive bid or comparable valuation exists; and
- The management of Midland, Inc. has determined that the transaction is in the best interest of the organization.
Disclosure in the organization should be made to the employee’s supervisor, who will, in turn, pass the information to Midland’s Conflict Review Committee. In cases where the supervisor is a party to the conflict, the matter will be brought directly to the Committee.
The Committee shall determine whether a conflict exists and, in the case of an existing conflict, whether the contemplated transaction may be authorized as just, fair, and reasonable to Midland. The decision of the Committee on these matters will rest in their sole discretion, and their concern must be the welfare of Midland and the advancement of its purpose.
Based on templates available from the Minnesota Council on Foundations (MCF), http://www.mcf.org. Used with permission of MCF.
IMA STATEMENT OF ETHICAL PROFESSIONAL PRACTICE
Members of IMA shall behave ethically. A commitment to ethical professional practice includes overarching principles that express our values and standards that guide our conduct.
IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility. Members shall act in accordance with these principles and shall encourage others within their organizations to adhere to them.
A member’s failure to comply with the following standards may result in disciplinary action.
Each member has a responsibility to:
- Maintain an appropriate level of professional expertise by continually developing knowledge and skills.
- Perform professional duties in accordance with relevant laws, regulations, and technical standards.
- Provide decision support information and recommendations that are accurate, clear, concise, and timely.
- Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.
Each member has a responsibility to:
- Keep information confidential except when disclosure is authorized or legally required.
- Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates’ activities to ensure compliance.
- Refrain from using confidential information for unethical or illegal advantage.
Each member has a responsibility to:
- Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest, and advise all parties of any potential conflicts.
- Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
- Abstain from engaging in or supporting any activity that might discredit the profession.
Each member has a responsibility to:
- Communicate information fairly and objectively.
- Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.
- Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.
RESOLUTION OF ETHICAL CONFLICT
In applying the Standards of Ethical Professional Practice, you may encounter problems identifying unethical behavior or resolving an ethical conflict. When faced with ethical issues, you should follow your organization’s established policies on the resolution of such conflict. If these policies do not resolve the ethical conflict, you should consider the following courses of action:
- Discuss the issue with your immediate supervisor except when it appears that the supervisor is involved. In that case, present the issue to the next level. If you cannot achieve a satisfactory resolution, submit the issue to the next management level. If your immediate superior is the chief executive officer or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with your superior’s knowledge, assuming he or she is not involved. Communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate, unless you believe there is a clear violation of the law.
- Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics Counselor or other impartial advisor to obtain a better understanding of possible courses of action.
- Consult your own attorney as to legal obligations and rights concerning the ethical conflict.
IMA Ethics Helpline Number for callers in the United States and Canada: (800) 245-1383
In other countries, dial the AT&T USA Direct Access Number from http://soc.att.com/28M6Kjv, then the above number.