Question

Russell Company is a pesticide manufacturer. Its sales declined greatly this year due to the passage of legislation outlawing the sale of several of Russell’s chemical pesticides. In the coming year, Russell will have environmentally safe and competitive chemicals to replace these discontinued products. Sales in the next year are expected to greatly exceed any prior years. The decline in sales and profits appears to be a one-year aberration. Even so, the company president fears a large dip in the current year’s profits. He believes that such a dip could cause a significant drop in the market price of Russell’s stock and make the company a takeover target.
To avoid this possibility, the company president calls in Zoe Baas, controller, to discuss this period’s year-end adjusting entries. He urges her to accrue every possible revenue and to defer as many expenses as possible. He says to Zoe, "We need the revenues this year, and next year can easily absorb expenses deferred from this year. We can’t let our stock price be hammered down!" Zoe didn’t get around to recording the adjusting entries until January 17, but she dated the entries December 31 as if they were recorded then. Zoe also made every effort to comply with the president’s request.
1. Who are the stakeholders in this situation?
2. What are the ethical considerations of (a) the president’s request and (b) Zoe dating the adjusting entries December 31?
3. Can Zoe accrue revenues, defer expenses, and still be ethical?
4. Can Zoe’s accrued revenues and deferred expenses be illegal?
5. Who do you think can discover Zoe’s accrued revenues and deferred expenses?

Answer 1

Answer:

1. The company's shareholders and management are the stakeholders in this circumstance.

2-a. The president's request is unethical.

2-b. Zoe's action is unethical.

3. It is possible for Zoe to accrue revenues and defer expenses while remaining ethical.

4. Again, it is possible for Zoe to accrue revenues and defer expenses while remaining ethical.

5. The person that can discover Zoe’s accrued revenues and deferred expenses is the auditor

Explanation:

1. Who are the stakeholders in this situation?

The company's shareholders and management are the stakeholders in this circumstance. The reason is that, in this circumstance, manipulating the company's profitability will have a direct impact on stock prices, which will affect the company's shareholders. The company's management is also a stakeholder in this scenario because they are involved in decision-making and make accounting-related choices and changes to the books of accounts. Lenders, employees, vendors, and lenders are secondary or non-primary stakeholders who will be impacted by the decision of the management to accrue as much revenue as feasible and defer every possible expenses.

2. What are the ethical considerations of (a) the president’s request and (b) Zoe dating the adjusting entries December 31?

2-a. The president's proposal goes against sound accounting practices. This will be interpreted as an attempt to window dress and manipulate accounting entries by the management in order to present a profit figure that is higher than reality. This is unethical behavior.

2-b. Zoe's decision to date the adjusting entries December 31 rather than January 17 was carried out with the explicit intention of distorting accounting figures, and inflating revenues by incorrectly accruing certain revenues and deflating expenses by incorrectly deferring some expenses. This is not only unethical, but also unlawful behavior.

3. Can Zoe accrue revenues, defer expenses, and still be ethical?

It is possible for Zoe to accrue revenues and defer expenses while remaining ethical if he does it in accordance with accounting principles and the GAAP and IFRS framework. It will not be ethical otherwise. When sales have occurred but have not been recorded through standard invoicing paperwork, it is legitimate to record them as accrued sales. However, declaring such transactions as accrued revenues will be unethical if buyers have paid in advance and items will be supplied next year.

4. Can Zoe’s accrued revenues and deferred expenses be illegal?

Again, it is possible for Zoe to accrue revenues and defer expenses while remaining ethical if he does it in accordance with accounting principles and the GAAP and IFRS framework, and if the federal and IRS regulations have not been breached. However, Zoe's behavior of accruing revenues and deferring expenses will be against the law if those modifications break accounting conventions and federal regulations.

5. Who do you think can discover Zoe’s accrued revenues and deferred expenses?

The person that can discover Zoe’s accrued revenues and deferred expenses is the auditor when he is reviewing the books of accounts of the company.