Bentley Dynamics, Inc., produces computer chips for personal electronic devices used to record music. The chips are sold primarily to large manufacturers; however, occasional production overruns may be discounted and sold to small manufacturers. Since Bentley’s operating budget assigns all fixed production expenses to its predictable market—large manufacturers—there are no fixed expenses allocated to products sold to small manufacturers. This results in significant profits in the small manufacturer market segment, even though the products are discounted.

All of Bentley’s products are tested for quality standards, and rejected chips are reworked to acceptable levels. The projected failure rate of reworked chips is determined to be 10 percent. Recently, however, customer feedback has suggested that the rework process is not always bringing the chips up to quality standards. Patty McCay, cost accountant, and Marty Cambiss, quality control engineer, have determined that a failure to maintain precise temperature levels during chip production results in a product defect that has a 50 percent failure rate. Unfortunately, current testing techniques do not detect this defect, so the company has no way to identify which chips will fail. Enhancements to the rework process would alleviate the defects problem; however, the additional cost is believed to be excessive, considering that half of the products would not benefit from the enhancement. Marty Cambiss and Patty McCay discussed this issue with Bentley’s marketing manager, Ellis Wynn, who has indicated that the defect problem will have a significant negative impact on the company’s reputation. Patty McCay has documented the problem in her report, which will be presented at the meeting of the board of directors next week. She is convinced that the problem will have a serious impact on the company’s profitability.

Upon reviewing the cost accounting report to be presented to the board of directors, the plant manager became enraged and stormed into the office of the controller, demanding that the report be revised to downplay the rework issue. The controller agreed that the report’s current presentation would draw too much attention to the problem and would likely be alarming to the board members. He instructed Patty McCay to revise the report and tone down the issue so as to avoid upsetting the board members.

Patty McCay is convinced that the board members would be misinformed if the serious nature of this problem were not highlighted in her report. She went back to Marty Cambiss and Ellis Wynn to try to solicit their support in pressing this issue; however, both of them were unwilling to get further involved in a matter that appears controversial.

Required:

a. What should Patty do? Explain your answer and discuss the ethical considerations that she should recognize in this situation.

b. What corporate governance functions are missing at Bentley’s? Be specific and describe the facts of the case and their relevance to corporate governance.