Harvard Case - Accounting Turbulence at Boeing
"Accounting Turbulence at Boeing" Harvard business case study is written by Jonas Heese, Suraj Srinivasan, David Lane, James Barnett. It deals with the challenges in the field of Accounting. The case study is 25 page(s) long and it was first published on : Aug 25, 2017
At Fern Fort University, we recommend a comprehensive overhaul of Boeing's accounting practices and corporate governance structure. This includes adopting a more transparent and robust cost accounting system, strengthening internal controls, and implementing a robust risk management framework. This will restore investor confidence, improve financial performance, and ensure long-term sustainability for Boeing.
2. Background
The case study 'Accounting Turbulence at Boeing' details the company's struggles with accounting irregularities and internal control weaknesses that ultimately led to significant financial restatements and a loss of public trust. The main protagonists are Boeing's leadership, including CEO Dennis Muilenburg, who faced intense scrutiny for their handling of the accounting issues, and the company's auditors, who were criticized for failing to detect the problems earlier.
3. Analysis of the Case Study
The case study highlights several key issues:
- Accounting irregularities: Boeing's accounting practices, particularly in the area of cost accounting, were found to be flawed. The company used overly optimistic assumptions and accounting methods that did not accurately reflect the true cost of its aircraft programs.
- Weak internal controls: Boeing's internal controls were inadequate, allowing for the accounting irregularities to go undetected for an extended period. This lack of oversight contributed to the company's financial reporting problems.
- Corporate governance failures: The case study reveals a breakdown in corporate governance, with board members failing to adequately oversee management and hold them accountable for their actions.
- External pressures: Boeing faced intense pressure from investors and regulators to improve its financial reporting and address the accounting issues.
To analyze the situation further, we can utilize the following frameworks:
- Porter's Five Forces: Analyzing the competitive landscape reveals that Boeing operates in a highly competitive industry with significant barriers to entry. This underscores the importance of maintaining a strong financial position and reputation to remain competitive.
- Value Chain Analysis: Examining Boeing's value chain reveals the critical role of cost accounting in its operations. Accurate cost analysis is essential for pricing strategy, profit margin optimization, and overall business performance.
- Corporate Social Responsibility (CSR): The accounting issues negatively impacted Boeing's CSR reputation, highlighting the importance of ethical and transparent business practices.
4. Recommendations
To address the challenges faced by Boeing, we recommend the following:
1. Accounting and Costing System Reform:
- Adopt Activity-Based Costing (ABC): Implement ABC to accurately track costs associated with specific activities and products. This will provide a more realistic view of the cost of production and improve decision-making.
- Strengthen Cost Accounting Procedures: Develop and implement rigorous cost accounting procedures and policies that align with Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
- Enhance Internal Controls: Implement robust internal controls to prevent future accounting irregularities and ensure accurate financial reporting. This should include regular audits and independent reviews.
2. Corporate Governance Enhancement:
- Strengthen Board Oversight: Enhance board oversight by increasing the independence of board members and establishing a robust audit committee with strong financial expertise.
- Improve Executive Compensation: Align executive compensation with long-term shareholder value and ethical behavior.
- Foster a Culture of Transparency and Accountability: Create a culture that emphasizes transparency, ethical behavior, and accountability at all levels within the organization.
3. Risk Management Framework:
- Develop a Comprehensive Risk Management Framework: Implement a robust risk management framework that identifies, assesses, and mitigates key risks, including financial, operational, and reputational risks.
- Establish a Risk Management Committee: Create a dedicated risk management committee responsible for overseeing risk assessment, mitigation strategies, and reporting.
- Regular Risk Assessment and Monitoring: Conduct regular risk assessments and monitoring to identify emerging risks and ensure that mitigation strategies are effective.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations align with Boeing's core competencies in aircraft manufacturing and its mission to provide safe and reliable transportation.
- External Customers and Internal Clients: The recommendations will improve Boeing's relationship with external customers (airlines and passengers) and internal clients (employees and investors).
- Competitors: By strengthening financial performance and reputation, Boeing can better compete in the highly competitive aerospace industry.
- Attractiveness ' Quantitative Measures: Implementing these recommendations will improve Boeing's financial performance, increase profitability, and enhance investor confidence.
6. Conclusion
The accounting turbulence at Boeing highlights the critical importance of strong accounting practices, robust internal controls, and effective corporate governance. By implementing the recommended changes, Boeing can restore investor confidence, improve financial performance, and ensure long-term sustainability.
7. Discussion
Other alternatives not selected include:
- Outsourcing accounting functions: While this could provide some short-term relief, it may not address the underlying issues of internal control weaknesses and corporate governance failures.
- Merging with another company: This could create significant challenges in integrating accounting systems and cultures and may not be a sustainable solution.
Key assumptions:
- Management commitment: The success of these recommendations hinges on the commitment of Boeing's leadership to implement the changes and hold themselves accountable.
- Employee buy-in: Employees must be engaged in the implementation process and understand the importance of the changes.
- Regulatory environment: The regulatory environment is expected to remain stable and supportive of the recommendations.
8. Next Steps
The implementation of these recommendations should be phased in over a period of 12-18 months. Key milestones include:
- Month 1-3: Develop a detailed implementation plan, including timelines, resources, and responsibilities.
- Month 3-6: Implement the new accounting system and strengthen internal controls.
- Month 6-9: Enhance corporate governance structure and establish a risk management framework.
- Month 9-12: Conduct ongoing monitoring and evaluation of the implementation process.
- Month 12-18: Continuously refine and improve the new accounting practices, internal controls, and corporate governance structure.
By taking these steps, Boeing can overcome the challenges it has faced and emerge as a stronger and more sustainable company.
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Case Description
Unlike its rival Airbus, Boeing used a practice called program accounting to record its commercial aircraft expenses since the 1980s. Program accounting allowed Boeing to expense estimated average costs instead of the actual production costs of an aircraft. This practice lowered the effect of the initially high costs of manufacturing new aircraft models on Boeing's profitability and reflected potential learning efficiencies that could drive down manufacturing costs over time. By 2016, Boeing had deferred about $27 billion in production costs related to its 787 program. If Boeing had been forced to expense these costs, it would have shown profits of $1.4 billion between 2012 and 2016 instead of $25.2 billion, raising questions about Boeing's true profitability.
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