Preserving the Ethicality of Accounting
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Preserving the Ethicality of Accounting
Kelly Littleton
ETH/376
May 14, 2012
Juan Vargas
Excello Telecommunications, once an integral leader in the telecommunication industry, has recently been faced with an increasing decline in productivity. A sizable equipment sale to Data Equipment at the end of Excellos fiscal year could be their saving grace. However, with all last minute deals it is important to preserve any and all legal and ethical responsibilities. The company has to consider the customary reporting of any state and federal laws associated with the sale, as well as abide by the accounting standards set forth by the generally accepted accounting principles (GAAP) regulation board to keep the sale above board; therefore, maintaining the ethicality Excello has worked so hard to secure.
For Excello Telecommunications 2010 was shaping up to be a financial disappointment. The company had been steadily losing business to overseas competitors for years, but this year was the worst. Top management became concerned about the effect on bonuses, stock options, and the share price of Excello stock. That is when Terry Reed, the CFO, learns of a transaction on December 20, 2010, that might solve the problem (Mintz & Morris, 2011). Data Equipment committed to a purchase of $1.2 million in telecommunication equipment; however, they would not be able to accept shipment until January 11, 2011 due to storage issues. This posed legal issues for Excello because, according to GAAP guidelines under the revenue recognition principle, record of the sale must be made when goods are shipped. Meaning the sale would need to be recorded in 2011 and not the end of 2010. Upon realizing this dilemma, Reed approached the Excello accounting team with strict instructions to devise a way to recognize the sale in 2010. The demand raises legal and ethical issues that will directly affect GAAP standards and provisions stated in the Sarbanes-Oxley Act of 2002 (SOX), as well as the certified public accountants professional code of conduct.
By facilitating the demands of the companys CFO the accounting team had to consider how their actions would coincide with SOX regulations. Recording the sale at the end of 2010 would inevitably boost sales for that year; also while the sale would not be officially complete until 2011 this would violate section 401, disclosure of periodic reports, of the SOX act. The section states each financial statement filed with the Security Exchange Commission (SEC) reflect all material correcting adjustments that have been identified by the audit firm in accordance with GAAP and the rules and regulations of the commission (Mintz & Morris, 2011). This section ultimately prevents a company from enhancing the current financial position to deceive investors and shareholders. By certifying the transaction, Reed would be in violation of section 302, corporate responsibility for financial reporting, as well. Section 302 requires the certification of periodic reports filed with the SEC by the CEO and CFO of public companies (Mintz & Morris, 2011). In the end, reporting the sale in 2010 would place Excello under fire by the SEC for repeated violations of the SOX act. The theoretical gain would ultimately cause distress for Reed as well as Excellos accounting team.
In conjunction with the SOX act, the accounting team needs to adhere to GAAP regulations. Among one of the most important regulations Excello should be concerned with is revenue recognition principle. The GAAP standard for revenue recognition principle determines the specific conditions under which income becomes realized as revenue (“Investopedia”, 2012). Recording the sale to Data Equipment prior to shipment puts Excello in violation of GAAP guidelines. Although, GAAP consists of common standards and procedures a company uses to impose consistency in financial reporting for an investors benefit, the guidelines can also help prove financial inconsistencies that, if needed, can be used against a company accused of any violations regarding SEC regulations. A blatant violation of GAAP standards will be committed if Excello records the sale in 2010 knowing it will falsely inflate that years overall income.
In addition to the legal implications the transaction will incur, is the ethical principles that cannot be ignored. As a publically traded company, Excello has an obligation to their shareholders, employees, and customers to accurately report financial transactions. This is in part because of the American Institute of Certified Public Accountants (AICPA). As a member of the AICPA, an accountant agrees to the unyielding commitment to honor the public trust (Mintz & Morris, 2011). In other words, the umbrella statement in the professional code of conduct is that the overriding