R ev enue and c o s t r e c o r ding and cla s sifications, ethics.

Aran Sweaters Ltd designs and markets wool jumpers to many retailers and distributors around Europe. Its corporate headquarters are situated in Dublin, Ireland. Manufacturing is done by a subcontractor (O’Neil’s Clothing Ltd) on Achill Island. The local council in Achill Island grants locally-owned companies a 20% income tax rebate if the ratio of their domestic labour costs to total costs exceeds 25%. Domestic labour costs are defined as the employment costs of all employees who are Achill residents. Siobhan Sheridan, the newly appointed controller of Aran Sweaters, has recently been examining payments made to O’Neil’s. She observes that O’Neil’s purchased wool from Aran Sweaters (€3 million in

2008). Aran Sweaters paid O’Neil’s €12 million for the jumpers manufactured on Achill in

2008. Based on her industry experience, the €12 million amount is very low. She was told it was ‘a great deal’ for Aran Sweaters. There is also a sizable payment by Aran Sweaters to the Swiss subsidiary of O’Neil’s (€4.8 million in 2008). Sheridan is told by the O’Neil’s CEO that this payment is for fabric design work that O’Neil does with Aran Sweaters. Aran Sweaters has included the €4.8 million payments in its own product design cost. The director of product design at Aran Sweaters told Sheridan it is an ‘off-statement’ item that historically he has neither responsibility for nor any say about. To his knowledge, O’Neil’s uses only Aran Sweaters designs with either zero or minimal changes.

O’Neil’s domestic labour costs in 2008 were €3.6 million while its total costs were €10 mil- lion. Included in this €3.6 million was €1.3 million for labour fringe benefits (for health insurance, etc.). A component of this €1.3 million is €600 000 for life insurance for O’Neil’s executives. Aran Sweaters helped arrange this life insurance policy. It negotiated with the insurance company managing its own executive life insurance plans to include the O’Neil’s executives at rates much more favourable than those available in Achill.

Required

1 What concerns should Sheridan have about the revenue and cost numbers in Aran

Sweaters’ financial reports?

2 Which (if any) of the concerns in requirement 1 raise ethical issues for Sheridan?

Explain.

3 What steps should Sheridan take to address the ethical issues you identify in requirement 2?