The restated 2004 Annual Report of Milacron, Inc. contained the following description of a material weakness in the company's internal controls:
Review of Complex and Judgmental Accounting Issues-There are inadequate levels of review of complex and judgmental accounting issues. Various audit adjustments were needed to correct errors resulting from this internal control deficiency, which manifested itself in the determination of deferred tax valuation allowances as well as litigation reserves and recoverables from third-party insurers. These adjustments are reflected in the company's audited financial statements for the year ended December 31, 2004. In addition, during the fourth quarter of 2005, the company became aware of the need to restate its consolidated financial statements because of the failure to consider the effect of a beneficial conversion feature on the calculation of basic and diluted loss from continuing operations per common share and net loss per common share. This error also represents an effect of the material weakness in review of complex and judgmental accounting issues. To address this material weakness, the company continues to implement remediation plans, including the following:
● The Company implemented increased levels of review of complex and judgmental accounting issues.
● The Company initiated a plan to add personnel with technical accounting expertise and began a search for qualified candidates.
● The Company implemented a new policy and guidelines for increased, individualized professional development for finance and accounting personnel. Milacron's 2005 Annual Report contained the following statement in the auditor's report on internal controls: "... in our opinion, Milacron Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria." Thus, the company successfully remediated the material weakness in internal controls concerning the complex and judgmental accounting issues that were the result of inadequate review and inadequate technical expertise and training of its accounting personnel.
Required
a. Use the decision analysis framework introduced in Chapter 3 to discuss how you would analyze whether the company's control remediation plans had been effective.
b. Assume that instead of remediating the material weakness, Milacron's controls over the complex and judgmental accounting issues continued to remain a problem because management did not have the cash resources necessary to hire more competent personnel or to improve training and professional development for its personnel. What are the ethical implications of such an outcome?