Excello Telecommunications: the Violation of the GAAP - Case Study Example

Abstract Knowing the intent and acting on the request to go around bending the GAAP is considered a violation of the AICPA Code of Professional Conduct. By simply contemplating of violating, going around or even bending the rule to satisfy a favorable condition is ethically untenable. Terry, in her desire to do the right thing for the company may have compromised the integrity and objectivity of Marty. Marty in his desire to satisfy or to meet the challenge of Terry wrongly consulted his team making them complicit to the ethical violation. The violation of the law will happen if the GAAP rule is not followed however, the ethical violation is in acting on the request to bend the rules knowing the full intent and outcome if successfully carried out. Contents Abstract 1 Excello Telecommunications 3 Legal Issues Involved 4 Ethical Issues Involved 4 The Best Alternative Course of Action 5 Bibliography 7 Excello Telecommunications Excello Telecommunications for many years has been profitable however, faced with increased competition for its products from overseas manufacturers its financial viability is considered uncertain and in the long history of the company, its earnings estimates cannot be met. Faced with investor confidence and morale issues in the company top management is concerned that the news about the shortfall will exacerbate the situation since it would affect bonuses, stock options and share price of Excello stock. Excello Chief Financial Officer Terry Reed learns of a transaction made on December 20, 2010, that could be the solution to the problem. On Dec 20, 2010, Excello Telecommunications and Data Equipment entered into a transaction where Excello sold $1.2 million worth of equipment to Data Equipment Systems. Under the rules, this type of transaction is recorded as a sale on the date of shipment. However, Data Equipment lacked the warehouse space to hold the product, thus it requested that Excello hold on to the product until January 11, 2011 (Mintz & Morris, 2008). On December 30, The Chief Finance Officer, Terry Reed approached Marty Fuller, the comptroller to discuss the dilemma. Marty Fuller, reminded Terry Reed about the rules in accounting for sales where the goods are held for future delivery. In response Reed told Fuller that she understands the rules, however, she told Fuller that he need to come up with a creative way complying with the rules while ensuring that the $1.2 million is recorded as revenue in 2010. To resolve the issue, Fuller calls a meeting of his staff in the accounting department to discuss the options they have. Fuller indicated two important constant points. First, the $1.2 million must be recorded in 2010. Second, whatever is decided it must be defensible from a GAAP point of view. The team comes up with the following alternatives: (1) Transfer the product to an off-site warehouse owned by Excello by December 31 and hold it until January 11 when it would be shipped to Data Equipment. (2) Transfer the product to Data Equipment by December 31 and agree that the customer could return it for a full refund after it arrives at Data Equipment's warehouse. (3) Offer Data Equipment a 10 percent discount to take the product by December 31. Legal Issues Involved The Sarbanes Oxley Act, specifically prohibit officers of the company to compromise the integrity of its financial transactions. From the case it would seem that no law has been violated since the case centers on how and when to record an actual transaction. Violation may arise if the actual recording of the sale did not follow the GAAP. The same is true for the regulatory financial reporting requirement of the SEC, now law will be violated if the GAAP is followed with fealty. Ethical Issues Involved The ethical dilemma started when Terry Reed approached Marty Fuller about her quandary with regards to how the sale of equipment to Data Equipment should be handled. Further ethical compromises also arose when Marty Fuller asked his staff in the accounting department to come up with creative ways of going around the Generally Accepted Accounting Practices. Under the American Institute of Certified Public Accountants’ Code of Professional Conduct, fear or favour should not take precedence over the proper recording of financial transactions under the Generally Accepted Accounting Principles rules. Having the intent of bending or going around the GAAP not only violates its essence but compromises the accountant that considers the GAAP its profession’s constitution if not its bible. The GAAP specifically states that revenue from sales will only be recognized if the customer has taken possession or have exercised his ownership over the product sold (Deloite Development LLC, 2008). The American Institute of Certified Public Accountants Code of Professional Conduct have explicit standards that make misrepresentation of records in violation of its code of professional conduct. It is likewise embodied in the Code that the GAAP standard is the operating handbook of all accountants and its faithful compliance to the GAAP shall be mandatory. Terry’s intention maybe good however, the people she have approached was not the right people to consult on the matter since she has compromised their integrity and objectivity. The ethical dilemma is in asking Marty to look for a way to bend or go around the rules and knowing the reason why it needs to be done. Marty on the other hand exacerbated the situation by asking his group for advice. The Best Alternative Course of Action None of the alternatives suggested by the staff of Marty Fuller is ethically a legally tenable due to the fact that its purpose is to subvert if not go around the Generally Accepted Accounting Principles. It should be noted that the AICPA, the GAAP as well as the Sarbanes Oxley Act calls for a complete and faithful reporting of all accounting transactions regardless of its effect and impact. Subverting the intent or going around the rules under the GAAP compromises the AICPA Code of Professional Conduct. Therefore, whatever recommendations the accounting staff will come up with will not only be tainted but it will be in direct violation of their ethical code as accountants. The best course of action for Terry Reed was not to approach Marty Fuller but to approach the Sales and Marketing Department or the sales agent that handled the sale. Terry Reed should have suggested if not ordered the person handling the sale to enter into an agreement with Data Equipment that will include sourcing out a temporary warehouse for Data Equipment to ensure the immediate delivery of the sold products to Data Equipments by December 31. The cost of the warehouse up to January 11 can be included in the agreed price including the transfer of the product from the outsourced warehouse to the warehouse facility of Data Equipments. Any extension on the short term lease will be for the account of Data Equipment. The cost of the temporary warehouse can be considered minimal if taking into account the repercussion of the sale to the financial health of Excello Telecommunications. This solution will not only resolve ethical questions but it will also ensure a good working relationship with Data Equipment since it would appear that Excello Telecommunications is willing to solve its temporary warehousing problem. The solution will likewise not compromise the ethical integrity of Marty Fuller and his accounting staff since as accountant they have the fiduciary responsibility to report questionable transactions under the Sarbanes Oxley Act. The solution may entail additional cost but its execution and its effect thereof will be in the long term interest of the Excello Telecommunications if not its survival. The debate will now focus on the obligation and ethical standard expected from the Chief Financial Officer. In fine the Chief Financial Officer’s obligation is to ensure that the financial health of the organization is at its prime if not its optimum while ensuring that Excello comply with the requirements of regulatory and governance statutes. The fiduciary responsibility of the Chief Financial Officer is to ensure that all transactions accrue for the benefit of Excello Telecommunications. It is expected by the shareholders, employees, investors, and other stakeholders. The legal obligation of the Chief Financial Officer is to ensure that all transactions are recorded clearly, correctly and completely by the company’s accounting department. Another aspect of the Chief Financial Officer’s function is to discern if not have the foresight to determine the impact, effect and repercussions of each transactions if it would accrue to the benefit of Excello Telecommunications. This unique responsibility allows the Chief Financial Officer to assist other departments to realize its targets if not capitalize on every opportunity that will consummate or conclude a sale at the soonest possible time. By assisting the Sales and Marketing agent to ensure the prompt delivery of the products to Data Equipment is keeping in fealty with the role a Chief Financial Officer. Bibliography Deloite Development LLC. (2008). U.S. Generally Accepted Accounting Principles Compliance Checklist. New York: Deloitte. Mintz, S., & Morris, R. (2008). Ethical Obligations and Decision Making in Accounting: Text and Cases. New York: McGVraw-Hill Ryerson. Read More