Budgeting, ethics, pharmaceutical company. Chris Jackson was recentily
promoted to Controller of Research and Development (R\&D) for BrisCor, a
Fortune 500 pharmaceutical company that manufactures prescription drugs and
nutritional supplements. The company's total R\&D cost for 2017 was expected
(budgeted) to be \(\$ 5\) billion. During the company's midyear budget review,
Chris realized that current \(\mathrm{R} \& \mathrm{D}\) expenditures were
already at \(\$ 3.5\) billion, nearly \(40 \%\) above the midyear target. At this
current rate of expenditure, the \(R \& D\) division was on track to exceed its
total year-end budget by \(\$ 2\) billion!
In a meeting with CF0 Ronald Meece later that day, Jackson delivered the bad
news. Meece was both shocked and outraged that the \(\mathrm{R} \& \mathrm{D}\)
spending had gotten out of control. Meece wasn't any more understanding when
Jackson revealed that the excess cost was entirely related to research and
development of a new drug, Vyacon, which was expected to go to market next
year. The new drug would result in large profits for BrisCor, if the product
could be approved by year-end.
Meece had already announced his expectations of third-quarter earnings to Wall
Street analysts. If the \(R \& D\) expenditures weren't reduced by the end of
the third quarter, Meece was certain that the targets he had announced
publicly would be missed and the company's stock price would tumble. Meece
instructed Jackson to make up the budget shortfall by the end of the third
quarter using "whatever means necessary."
Jackson was new to the controller's position and wanted to make sure that
Meece's orders were followed. Jackson came up with the following ideas for
making the third-quarter budgeted targets:
a. Stop all research and development efforts on the drug Vyacon until after
year-end. This change would delay the drug going to market by at least 6
months. It is possible that in the meantime a BrisCor competitor could make it
to market with a similar drug.
b. Sell off rights to the drug Martek. The company had not planned on doing
this because, under current market conditions, it would get less than fair
value. It would, however, result in a one-time gain that could offset the
budget shortfall. \(0 f\) course, all future profits from Martek would be lost.
c. Capitalize some of the company's \(\mathrm{R} \& \mathrm{D}\) expenditures,
reducing \(\mathrm{R} \& \mathrm{D}\) expense on the income statement. This
transaction would not be in accordance with \(\mathrm{GAAP}\), but Jackson
thought it was justifiable because the Vyacon drug was going to market early
next year. Jackson would argue that capitalizing \(R \& D\) costs this year and
expensing them next year would better match revenues and
expenses.
1\. Referring to the "Standards of Ethical Behavior for Practitioners of
Management Accounting and Financial Management," Exhibit \(1-7\) (page 17 ),
which of the preceding items (a-c) are acceptable to use? Which are
unacceptable?
2\. What would you recommend Jackson do?
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