Consider what you have learned relative to ethics and financial reporting. What is the rationale for the calculations/process used to estimate the $180,000 uncollectible allowance?
Effective financial reporting requires accounting professionals to observe ethical behavior in the course of their duties. Management and other key stakeholders rely on financial statements to make decisions, so accurate and reliability in financial reporting is paramount. Financial scandals on the part of accounting professionals in the past have resulted in strict legislations to ensure that honesty, integrity, and transparency are maintained (Armstrong, Ketz & Owsen, 2003). The legislations also require that adequate disclosures are made when reporting financials of a company. In the case of XYZ manufacturing company, the assistant controller is under the obligation to follow the GAAP in reporting the allowance for uncollectible accounts. In this case, the company follows the accounts receivable aging method that requires the outstanding accounts receivables to be grouped depending on age. A specific percentage is then applied to each category. Any attempts to revise the allowance for uncollectible accounts to the current status is tantamount to misstatement and misreporting of financial statement, which is an offense
How do you think the misstatement of funds will impact the income statement and balance sheet?
The misstatement of allowance for uncollectible accounts from $180,000 to $135,000 will increase the earnings before taxes by $45,000. As a result, a higher net profit would be reported in the income statement. Similarly, the misstatement will increase the company’s current assets since the accounts receivables will increase by $45,000. This action is intended to make the company look financially healthier than it is (Lurie & Albin, 2007). Misstatement of financial information is illegal as it represents a false picture of the company in terms of financial performance.
What is the ethical dilemma you face? What are the ethical considerations? Consider your options and responsibilities as an assistant controller.
As an assistant controller, you are under the obligation to follow the generally accepted accounting principles in making a reasonable and accurate estimate of the allowance for uncollectible accounts. The dilemma here is whether your responsibility to present accurate financial statements of XYZ manufacturing company overrides your obligation of improving the financial position of your boss. The first option and the most ethical thing to do is to decline the controller’s request to alter the age category of the accounts receivables in order to preserve integrity and honesty as an accounting professional (Lurie & Albin, 2007). However, the negative consequences of this option is the possible loss of a job.
The other option is to comply with the controller’s request to report a lower allowance for uncollectible accounts of $135,000. The positive consequence of this option is that the assistant controller would retain his job. Similarly, the company will enjoy a more favorable position in the eyes of external parties, such as investors, creditors, and financial analysts (Lurie & Albin, 2007). However, the assistant controller will have to deal with the guilt of his actions in the future. He might also face litigation from the creditors and investors in the future is they discover about his actions.
Identify the key internal and external stakeholders. What are the negative impacts that can happen if you do not follow the instructions of your supervisor?
The key internal stakeholders include the managers, employees, and the board of directors. On the other hand, the external stakeholders include the creditors, investors, government, and financial analysts (Armstrong, Ketz & Owsen, 2003). If the assistant controller declines to comply with his supervisor’s suggestion, the worst that can happen is the loss of a job.
What are the potential consequences if you do comply with your supervisor’s instructions? Who will be negatively impacted?
Complying with the supervisor’s request would expose the assistant controller to possible litigation from the external stakeholders who rely on the financial information of the company to make critical investment decisions (Armstrong, Ketz & Owsen, 2003). The most affected parties are the investors and creditors since they rely on this information to do business with the company.
Armstrong, M. B., Ketz, J. E., & Owsen, D. (2003). Ethics education in accounting: Moving toward ethical motivation and ethical behavior. Journal of accounting education, 21(1), 1-16.
Lurie, Y., & Albin, R. (2007). Moral dilemmas in business ethics: From decision procedures to edifying perspectives. Journal of Business Ethics, 71(2), 195-207.