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It is important to outline the details contained in the case study to understand the options the company has and how these relates to the ethics in accounting. The company faces a dilemma due to its profitability status. The company has been profitable over the years but has failed to maintain its profitability due to increased competition.
This has put the company on a tough spot as the management is concerned about other parties in the company associated with the profits. They fear that the company might not be able to maintain a good share price in the stock market. The management is also concerned with the stock options as well as the effect reduced profitability has on bonuses. It is clear to note that the company is desperate to make a profit.
The company is handling an issue where it is bound to make a good profit in the trading period. This profit might work out just fine for the company, as it will help to deal with the issues concerned with the stock market as well as improving the company’s image. According to (Anand, 2011) the situation revolves around the sale of equipment worth $1.2 million to Data Equipment Systems.
Sales records reflect the same dates with the shipment dates. For example, the sale would go into the books on the day the equipment is shipped from the possession of Excello Telecommunication to Data Equipment Systems. This is the expected procedure, which represents the law by the book. Data Equipment Systems presented the company with an unusual scenario.
They requested that Excello Telecommunications hold on to the equipment until they had found space to store the equipment. The date set by Data Equipment System was January 11, 2011. From the date set by Data Equipment Systems for the shipment, the sale would have to be recorded on a date later than that year (2010).
The management was pushing for a situation where they would actually record the sale before the end of the year. The situation where the company’s profitability is in conflict with the regulations stipulated by the book presents the dilemma. Should the company record the sale and maintain its profitability, or should the company stick to the rules and loose its profitability (Anand, 2011).
The management called for a meeting to discuss the situation is arising from the sale. The meeting took place between the accounting department and the management. The CFO wanted the sale to be recorded as the one, which took place in 2010 although this was contrary to the law. The CFO also wanted backing from a GAAP point of view in the event the sale took place.
Having this in mind, the accounting department offered the CFO three options. One of the options was that the company transfers the sold equipment to one of its own off-site warehouses before December 31 and then holds it until January 11 for it to be shipped to Data Equipment. The second option was that Excello Telecommunications transfers the sold equipment to its own warehouse and provides Data Equipment Systems with an agreement where they would be able to return the sold equipment for a total refund after it has arrived at Data Equipment Warehouse.
The third option – the most lucrative, was that Excello Telecommunications offers Data Equipment Systems a 10 percent discount in the event they agree to take possession of the sold equipment by December 31 (Crawford & Lloyd, 2008).
There are legal issues involved in the sale presented in the case. These legal issues are on the state and federal laws. In the process of trade, the details contained are supposed to be explained to both parties to their full understanding. In this case, the CFO is pushing for a sale to have it recorded in 2010. The nature of the sale sets the sale in a time beyond the year 2010.
For this reason, the CFO is trying to come up with ways through which the sale can be recorded as having taken place in 2010. All this is done after the exchange of cash has been done. The intentions of the Excello Telecommunications have not been made clear to Data Equipment Systems.
The Sarbanes-Oxley Act is one of the rules that govern this case. The act governs public investors, corporate auditing, and accounting in public companies. The act was enacted as a result of increased misconduct in accounting that cost investors a lot of money.
The Act is divided into different sections that govern disclosure in the practice of accounting (Crawford & Lloyd 2008). The act is important in regards to disclosure controls, disclosure in periodic reports, assessment of internal control, accounting and auditing in smaller public companies, and the criminal penalties for the violation of the regulations stated therein. Section 302 of the act mandates the manner in which an internal procedure should take place.
The section clearly states that the office in charge of signing is supposed to certify or make known the fact that they are utterly responsible for maintaining and establishing internal controls. The internal controls should also be designed to ensure material information contained in or relating to the company and any other consolidated subsidiaries are laid out to the officers and parties within the specified entities (Duska & Ragatz, 2011). This was to be done within the period during which the reports and or audits are prepared.
The Company has a 90 days period through which they are to evaluate and analyze the effectiveness of the internal controls as well as reporting on this. The financial reporting standards are important as they ensure that the processes involved in auditing and financial reporting adhere to ethical standards. Through these standards, the concepts between profit making and capital are defined.
The standards are also concerned with the concepts of maintaining capital. The manner in which the current costs are measured can be seen under the financial reporting standards. The standards are responsible for explaining the differences that arise from the concepts and how these are integrated in the practice of auditing and financial reporting. In the AICPA, the interactions in business are laid out with regards to what is accepted from each party.
Through the AICPA, the principles of professional conduct are well laid out. These define what is expected from individuals who have been certified as being professional and the manner in which they are expected to conduct themselves (Needles & Powers, 2010). The rules that are set in the AICPA are also well defined.
Apart from the definitions, the AICPA also deals with applicability of the laws set to govern the practice of accounting and financial reporting. The independence, integrity and objectivity of the involved parties are also outline in the AICPA. The general standards expected in the accounting principles are also outlined and the responsibilities of the colleagues and clients can be found in the AICPA (Needles & Powers, 2010).
Reference
Anand, S. (2011). Essentials of Sarbanes-Oxley. New York: John Wiley & Sons.
Crawford, M.A. and Loyd, D.S. (2008). CPA’s Multistate Guide to Ethics and Professional Conduct (2008). London: Cch Inc.
Duska, R. and Duska, B.S. and Ragatz, J.A. (2011). Accounting Ethics. New York: John Wiley & Sons.
Needles, B.E. and Powers, M. (2010). International Financial Reporting Standards: An Introduction. Ohio: South-Western Cengage Learning.
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