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ACC 205: Week 1 Discussion - Ethical Issues in Financial Reporting

Discussion on ethical issues in financial reporting.

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ACC 205: Week 1 Discussion-Ethical Issues in FinancialReportingACC 205 WEEK 1 DQ 1Ethical Issue 1-1-Xiaping Trading CompanyEthical Issue 1-1The board of directors of Xiaping Trading Company is meeting todiscuss the past year's results before releasing financial statements to the bank. Thediscussion includes this exchange:Wai Lee, company owner: “This has not been a good year! Revenue is down and expensesare way up. If we are not careful, we will report a loss for the third year in a row. I cantemporarily transfer some land that I own into the company's name, and that will beef upour balance sheet. Brent, can you shave $500,000 from expenses? Then we can probablyget the bank loan that we need.”Brent Ray, company chief accountant: “Wai Lee, you are asking too much. Generallyaccepted accounting principles are designed to keep this sort of thing from happening.”Requirements1.What is the fundamental ethical issue in this situation?2.How do the two suggestions of the company owner differ?Ethical Issue 1-1Req. 1The fundamental ethical issue in this situation is letting the financial statements tell thetruth about the company’s performance and financial position. There are two specificitems to address. First of all, transferring the land violates GAAP because it is a shamtransaction that is not at arm’s length. The second issue is that of “shaving expenses.” If by“shaving” is simply meant reducing expenses, this is not a problem. If it meansreclassifying expenses in an effort to boost net income, it is false and dishonest.

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Document Details

University
National University
Subject
Accounting

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