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Ethical Issues Within The Field Of Accounting

Ethical Issues Within The Field Of Accounting

Steve Morgan, who works as the controller for Newton Industries, experiences an ethical issue in his company. While reviewing the production costs reports for the annum, he realized the amount in these reports was wrongly reported in the financial statements. The company incurred substantial advertising expenses during the year as it engaged in aggressive sales and marketing aimed at moving the slow-moving commodities in the warehouse. Unfortunately, the firm could not measure this investment outcome since it was yet to quantify the value earned from the sales and marketing activities (HR & Aithal, 2020). For this reason, the advertisement cost would considerably lower the profitability for the period. For this reason, the Vice President of the Finance department recommended that the advertising expense should be reported as the cost of production, like the direct labor and materials, to minimize its adverse impacts on profitability. Hence. The advertisement expense would be identified as the cost of raw materials. Morgan and his colleagues opposed this proposal and suggested that the advertisement cost be reported as an operating expense. The president’s final decision, stating that the advertisement expense should be reported as inventory, led to unethical financial reporting, resulting in imprecise financial statements that are misleading to investors.

What are the ethical issues involved in this situation?

The ethical issue, in this case, is the non-compliance of the company with the accounting standards and principles. The principles require the explicit illustration of the advertising operation for the deferred expense. When the period between the advertisement and the sale elapses, the sale is no longer considered a cause for the sales revenue earned—secondly, the advertisement’s purpose of eliciting a direct response from the sale. The accounting standards posit the advertisement’s purpose is to elicit the targeted response, which is identifying the segment of customers that the advertisement activities would persuade (HR & Aithal, 2020). Thus, the revenue earned from these customers would be recorded within the period. If the revenue is not recognized during the same period, it is not considered a result of the marketing efforts. Furthermore, financial reporting is governed by the revenue, expense, matching, cost, and objectivity principles. The revenue principle describes how the bookkeepers would record the revenue transaction on the books of accounts (Bondoc & Taicu, 2019). It states that the business’s revenue is recorded at the point of sale.

In this case, the marketing activities’ revenue can neither be postponed nor forwarded to a future period. The expense principle defines the period in which the bookkeeper should record a transaction as an expense in the period in which it occurs. The cost principle requires that companies record the historical expense of the book’s products. Lastly, the objectivity principle requires representing factual and verifiable data in financial statements. The subjective data appears to be better than verifiable data. In this case, advertisement cost presentation as inventory expense constitutes false information. The case is also unethical because the president misrepresents the company’s financial performance. The reporting of the advertisement expense as the revenue, so an attempt to portray the high profitability of the company’s performance would be misleading to the stakeholders.

Identify the stakeholders in this scenario and discuss what you would do if you were Steve Morgan.

Notably, the stakeholders affected by the misrepresentation of advertisement costs in the financial statements include the investors, employees, government, creditors, shareholders, and customers (Rashid et al., 2018). Investors utilize the company’s financial statements in making investment decisions. In this case, they would perceive the company as profitable and invest by purchasing its shares. Unfortunately, their expectations would not be met, seeing that their financial reports paint a false picture of their actual performance. Hence, this financial reporting would mislead potential investors in making investment decisions. The employees utilize the financial reports to analyze the company’s viability and stability in determining their job security. The reports are misleading in that they portray a false picture of the company’s profitability, impeding the firm’s workers from thoroughly analyzing its financial performance. The government utilizes financial reports to determine the company’s compliance with accounting standards.

The government requires that companies located in the US prepare these statements in line with GAAP to ensure precise reporting and facilitate sector-wide comparison. Secondly, the government utilizes financial statements to establish whether the company is tax-compliant. The misrepresentation of the profits would mislead the government on its accountability in servicing its obligations. The creditors utilize financial statements to determine the company’s profitability and leverage to evaluate its capability in servicing its short- and long-run debt obligations. In this case, the company is overstating its profitability, hence misleading the creditors on its capacity to service the loan payments. Before issuing debt, the financial institutions evaluate the firm’s revenue and profits in determining their effectiveness in repaying the loan’s principal and interest. The form would qualify for a loan; it would not afford to service in this case. The stakeholders require the company’s financial information to determine the dividends from a specified fiscal year. Some companies regularly pay dividends and repurchase stocks depending on the implemented dividend policies. These activities are dependent on the profits earned by the company. Lastly, the customers require financial information to evaluate the company’s performance in compare it against its key competitors. In this case, the false picture of the firm’s financial performance would mislead customers in making the decision.

Conclusion

The decision leading to unethical financial reporting results in imprecise financial statements that are misleading to investors. The president’s decision creates ground for the company to act unethically through non-compliance with the financial reporting standards and regulations. This decision also leads to the preparation of imprecise financial statements that are misleading to the stakeholders.

References

Bondoc, M. D., & Taicu, M. (2019). Ethics in financial reporting and organizational communication. Scientific Bulletin-Economic Sciences18(3), 168-174.

HR, G., & Aithal, P. S. (2020). Attitudes and Perspectives of Key Stakeholders in the Retail Start-ups toward Long-Term and Sustainably Profitable Business Model in India-An Empirical Evaluation. International Journal of Applied Engineering and Management Letters (IJAEML)4(2), 174-187.

Rashid, N., Asfthanorhan, A., Johari, R. J., Hamid, N. A., Yazid, A. S., Salleh, F., & Salleh, F. (2018). Ethics and Financial Reporting Assurance. International Journal of Academic Research in Business and Social Sciences8(11), 1346-1355.

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Question 


AC330: Managerial Accounting for Business Professionals I Unit 6 Assignment  

Assignment:

This Assignment is assessed by GEL-7.01:Identify the ethical issues within the field of Accounting.

Ethical Issues Within The Field Of Accounting

Ethical Issues Within The Field Of Accounting

Steve Morgan, controller for Newton Industries, was reviewing production cost reports for the year. One amount in these reports continued to bother him: advertising. During the year, the company had instituted an expensive advertising campaign to sell some of its slower-moving products. It was still too early to tell if the advertising campaign was successful.

There had been much internal debate as to how to report the advertising cost. The VP of Finance argued that advertising costs should be reported as a cost of production, just like direct materials and direct labor. He therefore recommended that this cost be identified as manufacturing overhead and reported as part of

inventory costs until sold. Others disagreed. Morgan believed that this cost should be reported as an expese of the current period, so as not to overstate net income. Others argued that it should be reported as prepaid advertising and reported as a current asset.

The president finally had to decide the issue. He argued that these costs should be reported as inventory. His arguments were practical ones. He noted that the company was experiencing financial difficulty and expensing this amount in the current period might jeopardize a planned bond offering. Also, by reporting the advertising costs as inventory rather than as prepaid advertising, less attention would be directed to it by the financial community.

Use the Internet, Purdue Global Library resources, and textbook to discuss this ethical case. In a 2-3 page paper,please respond to the following:

  1. What are the ethical issues involved in this situation?
  2. Identify the stakeholders in this scenario and discuss what you would doif you were Steve Morgan.

(CT 1.5)

Write your responses in a Word document and submit to the Dropbox. This Assignment is due on the last day of Unit 6.

Assignments Submission Requirements: Written response must follow the following formatting guideline Microsoft Word document, title page, double-spacing, 12-point Times New Roman or Arial font.one-inch margins, APA in-text citations and an APA reference list of at least two references. Page length requirement 2-3 pages, not counting title page and reference list page.

Once completed, submit your Assignment to the Unit 6 Assignment Dropbox. Assignments are due Tuesday 11:59 p.m. ET of their assigned unit.

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