erinnetter
Jul 13, 2011, 06:27 PM
The board if directors of Xiaping Trading Company is meeting to discuss the past year's results before releasing financial statements to the public. This discussion includes this exchange:
Wai Lee, company president: “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 in 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 back 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.”
1. What is the fundamental ethical issue in this situation?
2. Discuss how Wai Lee's proposals violate generally accepted accounting principles. Identify each specific concept and principle involved.
Wai Lee, company president: “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 in 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 back 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.”
1. What is the fundamental ethical issue in this situation?
2. Discuss how Wai Lee's proposals violate generally accepted accounting principles. Identify each specific concept and principle involved.