Ethics in Accounting Assignment Instructions
Effective financial reporting depends on sound ethical behavior. Financial scandals in accounting and the businesses world have resulted in legislation to ensure adequate disclosures and honesty and integrity in financial reporting. A sound economy is contingent on truthful and reliable financial reporting.
Read the following scenario and answer the questions that follow. (1-2 paragraphs per question) . Reference back to your text book for guidance on how to think through the scenario.
Linbarger Company Scenario:
Imagine you are the assistant controller in charge of general ledger accounting at Linbarger Company. Your company has a large loan from an insurance company. The loan agreement requires that the company’s cash account balance be maintained at $200,000 or more, as reported monthly. At June 30, the cash balance is $80,000. You give this update to Lisa Infante, the financial vice president. Lisa is nervous and instructs you to keep the cash receipts book open for one additional day for purposes of the June 30 report to the insurance company. Lisa says, “If we don’t get that cash balance over $200,000, we’ll default on our loan agreement. They could close us down, put us all out of our jobs!” Lisa continues, “I talked to Oconto Distributors (one of Linbarger’s largest customers) this morning. They said they sent us a check for $150,000 yesterday. We should receive it tomorrow. If we include just that one check in our cash balance, we’ll be in the clear. It’s in the mail!”
- What is the accounting problem that the Linbarger Company faces?
- What are the ethical considerations in this case? Provide rationale for why these are ethical considerations.
- What are the negative impacts that can happen if you do not follow Lisa Infante’s instructions to wait one more day to post the balance?
- Who will be negatively impacted if you do comply? Provide a rationale for why these individuals will be impacted.
- What is one alternative that you could pursue in this scenario? Support your recommendations with information you learned in this class.
Linbarger Company Scenario Questions Sample Answers
What is the accounting problem that the Linbarger Company faces?
Linbarger seems to be selling its product more on credit than cash. The company also has are many account receivable days, meaning that its credit account takes long to be paid than the company can bear. The company thus ends up experiencing liquidity accounting problem. The company has been unable to maintain its cash balance at the intended level. There is an issue in cash control in the company, putting it at the crossroad. The company should have tried to maintain its cash flow in a level that it is able to handle its short-term obligations. Inability to do so brings in the liquidity or cash accounting problem.
What are the ethical considerations in this case? Provide rationale for why these are ethical considerations.
Good accounting requires that ledger book may be opened in the beginning of the month and closed at the end of the month. In this case, the company is considering keeping the ledger book open one day past the required time to save its self from cash availability issue. This is unethical act that goes against right accounting process. It offers the wrong picture of the actual situation. The accounts need to be closed at the right time for future reference and for proper judgment of the company’s financial health. The act shows deception in the company’s ability to handle the terms of the loan. This deception is unethical since it gives a false financial portrayal of the company to its debtors.
What are the negative impacts that can happen if you do not follow Lisa Infante’s instructions to wait one more day to post the balance?
Based on Lisa explanation, not leaving the book open for one more day will show that the company closed the month with a cash balance of $80000, which is below what is agreed upon by its lenders. It will thus be considered to have defaulted the loan terms, which may result to closure of the company. This means, there will be loss of business and jobs. On another view, not following Lisa instructions may result to assistant controller job termination, and the act is carried out by another person with ability to do it, for instance the company controller with ability to handle ledger accounts. The two possible occurrence are risky, and hence it is much easier to follow the provided instructions.
Who will be negatively impacted if you do comply? Provide a rationale for why these individuals will be impacted.
The main individuals who are likely to be negatively impacted by complying with the provided instructions are the company’s shareholders and investors. This is because the act of leaving the accounting books open past the required date may create a loophole that will result to future accounting malpractice. These malpractices can result to fraud. The company may develop a habit of adjusting cash balances among other accounting documents to safe itself from wanting situations. By so doing, the company will be creating gaps that can be used by malicious accountants or managers to fraud its investors or to deceive them on the company’s actual financial value or financial health. This may also affect all company stakeholders in the long-run since it may result to a fraud scandal that will leave the company broke and unable to sustain all its stakeholders. To avoid all these issues, the company should maintain the discipline of closing all its books at the right dates without exceptional.
What is one alternative that you could pursue in this scenario? Support your recommendations with information you learned in this class.
The one alternative the assistance controller should have is trying to explain to Lisa on the danger the request act can create for the company. The controller should convince Lisa to allow the accounting process to go on as normal and try to talk to the insurance company on transportation hitches that made the cash balance read low than they were supposed. The insurance company should get a notice that due to delays in cheque transportation, and due to unexpected cash use, the balance will be below the agreed amount, and give assurance that that will not happen again. This will help in eliminating chances for unethical act and creating loopholes for fraud and save the company from the default consequences.