Electronics Corporation (KEC) is an eight-year-old company that has developed a process to produce highly reliable electronic components at a cost well below the established competition. In seeking to expand its overall components business KEC decided to enter the facsimile equipment business as there was a niche for lower-priced facsimile machines in a vigorously growing marketplace. The market KEC pursued consisted of small regional businesses not yet approached by the larger vendors. KEC sells its machines with a one-year warranty and has established a maintenance force to handle machine breakdowns.

As KEC customers learned of the benefits of fax transmissions, some increased their usage significantly. After six months, large-volume users began experiencing breakdowns, and the field technicians' portable test equipment was not sophisticated enough to detect hairline breaks in the electronic circuitry caused by the heavier-than-expected usage. Consequently, field technicians were required to replace the damaged components and return the defective ones to the company for further testing.

This situation caused an increase in maintenance costs, which added to the cost of the product. Unfortunately, there was no way to determine how many of the businesses would become heavy users and be subject to breakdowns. Some of the heavier-volume users began switching to the more expensive machines available from the larger competitors. Although new sales orders masked the loss of heavier-volume customers, the increased maintenance costs had an unfavorable impact on earnings. In her recent report prepared for the quarterly meeting of the board of directors, Mary Stein, KEC's assistant controller, summarized this situation and its anticipated affect on earnings.

Jim March, vice president of manufacturing, is concerned that the report does not provide any solutions to the problem. He asked Maria Sanchez, the controller, to have the matter deferred so that his engineering staff could work on the problem. He believes that the electronic components can be redesigned. This redesigned model, while more costly, could be an appropriate solution for the heavier-volume users, who should not expect a low-cost model to serve their anticipated needs. March expects that the board could decide to discontinue the product line if no immediate solution is available, and the company could miss a potentially profitable opportunity. March further believes that the tone of the report places his organization in an unfavorable light.

The controller called Stein into her office and asked her to suppress the part of the formal report related to the component failures. Sanchez asked Stein to just cover it orally at the meeting, noting that "engineering is working with marketing on the situation to reach a satisfactory solution." Stein feels strongly that the board will be misinformed about a potentially serious impact on earnings if she follows the advice of Sanchez.

Required

1. Refer to the IMA's Statement of Ethical Professional Practice (www.imanet.org). Explain why the request from Maria Sanchez to Mary Stein is unethical. Cite both actions and nonactions on the part of Sanchez that result in an unethical situation.

2. Identify steps that Mary Stein should follow to resolve the situation.

(CMA Adapted)