Cleveland Custom Cabinets is a specialty cabinet manufacturer for high-end homes in the Cleveland Heights and Shaker Heights areas.The company manufactures cabinets built to the specifications of homeowners and employs 125 custom cabinetmakers and installers.There are 30 administrative and sales staff members working for the company.
James Leroy owns Cleveland Custom Cabinets.His accounting manager is Marcus Sims,who reports to the director of finance,Alison Mayhew.Sims manages 15 accountants.The staff is responsible for keeping track of manufacturing costs by job and preparing internal and external financial reports.The internal reports are used by management for decision making.The external reports are used to support bank loan applications.
On April 10,2016,Leroy came into Sims's office to pick up the quarterly report.He looked at it aghast.Leroy had planned to take the statements to the bank the next day and meet with the vice president to discuss a $1 million working capital loan.He knew the bank would be reluctant to grant the loan based on a net income of $90,000 on revenue of $6,400,000.Without the money,Cleveland could have problems financing everyday operations.
Leroy called Mayhew to come to Sims's office.Leroy then asked for an explanation of how net income could have gone from 14.2 percent of sales for the year ended December 31,2015,to 1.4 percent for March 31,2016.Sims pointed out that the estimated overhead cost had doubled for 2016 compared to the actual cost for 2015.He explained to Leroy that rent had doubled and the cost of utilities skyrocketed.In addition,the custom-making machinery was wearing out more rapidly,so the company's repair and maintenance costs also doubled from 2015.
Leroy wouldn't accept Sims's explanation.Instead,he told Sims that the quarterly income had to be at least the same percentage of sales as at December 31,2015.Mayhew agreed with Leroy and said there had to be a mistake and it would be corrected.Sims looked confused and reminded Leroy and Mayhew that the external auditors would wrap up their audit on April 30.Leroy told Sims not to worry about the auditors.He would take care of them.Furthermore,"as the sole owner of the company,there is no reason not to 'tweak' the numbers on a one-time basis.I own the board of directors,so no worries there." He went on to say,"Do it this one time and I won't ask you to do it again." He then reminded Sims of his obligation to remain loyal to the company and its interests.Sims started to soften and asked Leroy just how he expected the tweaking to happen.Leroy flinched,held up his hands,and said,"I'll leave the creative accounting to you and Mayhew."
Required:
Analyze the case using GVV.
•What are the main arguments Sims is trying to counter? What are the reasons and rationalizations Sims needs to address?
•What is at stake for the key parties?
•What levers can Sims can use to influence Leroy and Mayhew?
•What is the most powerful and persuasive response to the reasons and rationalizations Sims needs to address? To whom and when?

A Client Asks His Accountant to Ignore a Mistake Which

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