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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 Financial Reporting ACC 205 WEEK 1 DQ 1 Ethical Issue 1 - 1 - Xiaping Trading Company Ethical Issue 1 - 1 The board of directors of Xiaping Trading Company is meeting to discuss the past year's results before releasing financial statements to the bank. The discussion includes this exchange: Wai Lee, company owner: “This has not been a good year! Revenue is down and expenses are way up. If we are not careful, we will report a loss for the third year in a row. I can temporarily transfer some land that I own into the company's name, and that will beef up our balance sheet. Brent, can you shave $500,000 from expenses? Then we can probably get the bank loan that we need.” Brent Ray, company chief accountant: “Wai Lee, you are asking too much. Generally accepted accounting principles are designed to keep this sort of thing from happening.” Requirements 1. What is the fundamental ethical issue in this situation? 2. How do the two suggestions of the company owner differ? Ethical Issue 1 - 1 Req. 1 The fundamental ethical issue in this situation is letting the financial statements tell the truth about the company’s performance and financial position. There are two specific items to address. First of all, transferring the land violates GAAP because it is a sham transaction 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 means reclassifying expenses in an effort to boost net income, it is false and dishonest.

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