Reference no: EM13485402

Residence Suites operates a regional hotel chain. Each hotel is operated by a manager and an assistant manager/controller. Many of the staff who run the front desk, clean the rooms, and prepare the breakfast buffet work part-time or have a second job, so turnover is high.

Assistant manager/controller Terry Dunn asked the new financial assistant to help prepare the hotel's master budget. The master budget is prepared once a year and submitted to company headquarters for approval. Once approved, the master budget is used to evaluate the hotel's performance. These performance evaluations affect hotel managers' bonuses; they also affect company decisions about which hotels deserve extra funds for capital improvements.

When the budget was almost complete, Dunn asked the financial assistant to increase amounts budgeted for labor and supplies 15%. When asked why, Dunn responded that hotel manager Clay Murry told her to do this when she began working at the hotel. Murry explained that this budgetary cushion gave him flexibility in running the hotel. For example, because company headquarters tightly controls capital improvement funds, Murry can use the extra money budgeted for labor and supplies to replace broken televisions or to pay ‘bonuses' to keep valued employees. Dunn initially accepted this explanation because she had observed similar behavior at her previous place of employment.

Put yourself in Dunn's position. In deciding how to deal with the situation, answer the following questions:

a) What problems exist in the budget preparation process?

b) What is the ethical issue?

c) What are the possible consequences of the current state of affairs?

d) Explain what Dunn should do.