CASE 1 (25 marks) PADDING THE BUDGET A departmental or divisional budget often is used as the basis for evaluating a manager's performance. Actual results are compared with budget performance levels, and those who outperform the budget often are rewarded with promotion or salary increases. In many cases, bonuses are tied explicitly to performance relative to a budget. For example, the top-management personnel of a division may receive a bonus if divisional profit exceeds budgeted profit by a certain percentage Serious ethical issues can arise in situations where a budget is the basis for rewarding managers. For example, suppose a division's top management will split a bonus equal to 10 percent of the amount by which actual divisional profit exceeds the budget. This may create an incentive for the divisional budget officer, or other managers supplying data, to pad the divisional profit budget. Such padding will make the budget easier to achieve, thus increasing the chance of a bonus. Alternatively, there may be an incentive to manipulate the actual divisional results in order to maximize management's bonus. For example, year-end sales could be shifted between years to increase reported revenue in a particular year. Budget personnel could have such incentives for either of two reasons: (1) they might share in the bonus or (2) they might feel pressure from the managers who would share in the bonus Put yourself in the position of the controller. Your bonus, and that of your boss, the division vice president, will be determined in part by the division's income in comparison to the budget. When your division has submitted budget in the past, the corporate management has usually cut your budget expenses, thereby increasing the division's budgeted profit. This of course, makes it more difficult for your division to achieve the budgeted profit. Moreover, it makes it less likely that you and your divisional colleagues will earn bonus. Now your boss is pressuring you to pad the expense budget, because the budgeted expenses will just be cut anyway at the corporate level." Required: 1. Identify the stakeholders in this case and state how each is affected (5 marks) 2. Is padding the budget ethical moral under these circumstances? Justify your answer. (3 marks) 3. If you were the boss, what would you do if the controller refused to succumb to your pressure on the grounds that what you are asking him to do is immoral? (5 marks) 4. What ethical or moral principles discussed in class come into play in this case? How do they apply in this case? What is the biblical perspective on these ethical/moral principles you cited? (8 marks) 5. What is the biblical perspective on padding a budget? (4 marks)