Reference no: EM13786613
Jim Smith has worked for the ABC Insurance Company for the past twenty-three years. Jim graduated with a top-notch accounting degree and he also has his MBA. Bar none, Jim is considered by everyone in his organization to be a brilliant accountant. At issue is that Jim's brilliance may be coupled with just a little too much "creativity" when one considers his approach to maximizing the company's profits.
At the end of every quarter, Jim calls up the supervisors of each of ABC's insurance branches, and asks them to estimate their outstanding insurance claims. These insurance claims represent money that the company very likely owes its customers – i.e., claims are estimates of money owed at the end of the quarter to ABC's customers who are likely to file a claim in the near future, but who have not yet done so (the total money owed - but still outstanding - is referred to as a "claims lag", since there is a lag from the date on which an insurable event has occurred to that point in time at which ABC has become aware that a customer has filed a valid claim).
For instance, based on historical experience, at the end of each quarter, Division 1 of ABC Company estimates that 20% of all claims for that quarter are still outstanding (i.e., an insurable event has occurred, but has not yet been reported to Division 1). This is the number (20%) reported to Jim. Being the "brilliant" accountant that he is, and in light of his sheer eagerness to maximize profits for the quarter (and because his quarterly bonus is based on each quarter's profits!), Jim reduces the outstanding claims reported by all of ABC's insurance divisions by 10%. In doing so, Jim has effectively reduced the company's quarterly claims expenses by this same 10% --- and voila! -- Jim has also managed a creative increase in his own quarterly bonus.
As you might guess, Jim sees nothing wrong in further reducing the divisions' company claims estimates, reasoning: "Look...they're all a bunch of estimates anyhow!" Jim further opines: "Besides, I have a duty to this company and to its stockholders - and that is to maximize profits!"
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