PDQ, Inc., is a supplier of residence alarm systems to building contractors. Charlie Roberts, the company's new CEO, is out to make a name for himself and makes it known to his management team that he plans for the company to meet, if not exceed, its sales target each quarter.
Charlie begins to realize that the company is falling short of its goal, and he quickly calls a management meeting to announce his new plan. He says he has arranged sweet deals with several of the company's largest customers. PDQ will pay the contractors a 2 percent fee to buy a large quantity of alarm systems just before the end of each quarter, with the understanding that PDQ will buy the alarm systems back shortly after the beginning of the next quarter. Charlie uses the term "buy" loosely because there is no plan for an exchange of cash. PDQ will record the sales transactions by debiting Accounts Receivable, crediting Sales Revenue, debiting Cost of Goods Sold, and crediting Inventory. When the alarm systems are bought back, PDQ will debit Inventory and credit Accounts Receivable, which, of course, will have no impact on the income statement.
Beth Dawson, the company's accountant, tells Charlie that there is a problem with his plan. She explains that under Generally Accepted Accounting Principles (GAAP), PDQ has not earned revenue until inventory is delivered to customers. Charlie quickly responds that he has everything under control. He explains to Beth that the contractors have agreed to accept automatic shipments of the alarm systems and carry them in the company's inventory as of quarter-end. Charlie says this is a "win-win" situation for everyone.
The plan did exactly what Charlie hoped it would do. The company reported sales that consistently exceeded expectations. These inflated sales figures helped to boost the company's stock price to an all-time high. Charlie considered himself a true winner. His compensation package included a lucrative stock bonus plan tied to the company's sales growth. As a result of the company's reported sales revenue, Charlie received stock in the company that he was able to sell for thousands of dollars at the inflated stock price.
Requirements
1. Is there any evidence of unethical behavior in this case? Explain your answer.
2. Other than Charlie and the contractors, who could be harmed by Charlie's plan?