Jeffrey Croslen 4-13-2011 ACCT 3112 Ethical Cases A.

You are the president and founder of Gold Strike Inc., a mining company that acquires land and mines gold. The success of your company is largely dependent on finding large deposits of gold. The success of your company is largely dependent on finding large deposits of gold. To do this requires expensive geological surveys and testing. You have used an engineering firm in the past that has proven quite reliable in its estimates of gold quality and quantity. Because of recent events around the world, the price of gold has declined approximately 15% in the past 6 months. Accounting practice allows your company to recognize revenue when the gold is mined and processed rather than waiting until it is actually sold. Because of the recent unexpected decline in gold prices, you find that your revenue has suddenly declined even though the quality and quantity of the gold being produced have been maintained. To avoid arousing investor concerns about your businesss future, you consider the following option. The engineering firm assures you that, based on its tests, large amounts of gold still exist in your mines. Because you can recognize revenue when the gold is mined and you know it is in the ground (based on your engineers assurances), could you recognize revenue for the gold that is in the ground but has not yet been mined? Now remember, you are not talking about accounting for fictitious gold. This gold does exist (again, based on your engineers estimates). It is unethical to recognize revenue for the gold that is in the ground and that has not been mined yet. According to these accounting practices, revenue should not be recognized until the gold is actually mined and processed. This would be fraudulent reporting. The company would also then be incorrectly allocates expenses to revenue. There would be an incorrect and smaller amount of expenses being allocated to a larger amount of revenue. This would not match up with the previous periods statements and may raise alarm to auditors. They would then see that the stated quantity of gold that has supposedly been mined has had a drastic increase. This would overstate your revenues and misstate your companys financial position in the short run. It may decrease your revenues in the future if the price of gold never increases again and the company runs out of gold to mine.

B. You and your partner own a small data-entry company. You contract with businesses to manually enter data, such as library card catalogs and medical records, into a computer databases. Your most significant physical assets are a large office building you own, along with the computer hardware and software necessary for operations. Your business has been running for five years, and you now have 100 employees. Operating cash flow has always been healthy, and you and your partner have been able

Jeffrey Croslen 4-13-2011 ACCT 3112 Ethical Cases to withdraw significant amounts of cash from the business. Recently, you have seen growing discontent among your employees because of their low wages and lack of fringe benefits. You and your partner are preparing for the first meeting with an employee grievance committee. Your partner has taken responsibility for preparing the companys financial statements. You are embarrassed to admit that this is the first set of financial statements you have ever examined you have never sought bank financing and all equity funding has come from you and your partner. You are surprised when you first review the statements because they reveal that the company has experienced significant losses in each of its five years of operation. A closer look at the statements reveals that your partner has used the doubledeclining-balance method of depreciation for your office building and computer equipment. He has also assumed very short useful lives and zero residual values. Your calculations indicate that using the straight-line method with more realistic useful life and residual value assumptions would increase profits dramatically, even to the extent that substantial profits would be reported in each of the first five years of operation. The meeting with the employee grievance committee is tomorrow. Your partner has been your friend since first grade. What, if anything, should you do? You should suggest to your partner to start using the straight-line method of depreciation with a more realistic useful life and residual value assumptions. Show him your findings so that he will know that the straight-line method is more profitable. However, you cannot go back and change your method of depreciation for prior years. The company must start using the straight-line method at the beginning of the next period. I would tell the grievance committee of the issue and hope that they would understand that it may take a while for profits to come in and for them to start receiving a better rate of wages and benefits.

C. You are the chief financial officer of a local manufacturing company, Larsen Enterprises. This company is run by two brothers, Steve and John Larsen. The Larsen brothers have built this company up from a small 5-man shop to a company now employing over 200 people. The national economy has recently taken a turn for the worse, which has affected the Larsens business. In fact, the companys performance of late has been such that it is in jeopardy of violating several of its debt covenants (promises made to the lending institution). If the company violates these covenants, the bank has the option of calling the debt due immediately. If the debt is called, Larsen is not sure what will happen, but it will certainly not be good. The covenant that is in jeopardy relates to the current ratio. If the current ratio

Jeffrey Croslen 4-13-2011 ACCT 3112 Ethical Cases drops below 2, Larsen Enterprises is considered in technical default on its debt. Steve and John have come to you and asked you to suggest ways in which the current ratio, which currently stands at 1.9, could be increased. Take a moment and think of ways in which the current ratio might be manipulated. Identify specific actions that the Larsen brothers might take to increase the current ration. Is it in the best interests of shareholders and lending institutions for Steve and John to make business decisions that have cosmetic effects on the financial statements? There are several ways that the current ratio could be manipulated. The company could remove certain current liabilities to increase their ratio of current assets over current liabilities. The company could also increase the ratio by adding cash payments that they know they will soon receive to their cash balance. This would increase their current assets. They could also do this by removing some from its unearned revenue account and moving some of that balance to the cash account. This would inflate the ratio because the company would have increased current assets and decreased current liabilities. It is not in the best interests of shareholders and lending institutions to make business decisions that have cosmetic effects on the financial statements. This is unethical, deceiving, and fraudulent. This would give them an incorrect view of the business and may cause them to invest more in the company. D. Best Ski Manufacturer usually pays a cash dividend sufficient to give investors a dividend yield (annual dividend divided by stock price) of around 6%. Last quarter, Best Ski Manufacturer paid a quarterly cash dividend of $1 per share. Its stock price is currently at $65 per share. In the current quarter, Best Ski has suddenly experienced a big slowdown in ski in ski equipment orders. The vice president of finance unequivocally stated that Best Ski just didnt have the cash to pay another cash dividend of $1 per share. She suggested that Best Ski make a public announcement explaining the situation to shareholders. This suggestion infuriated the chief executive officer, who subsequently insisted that nothing be done to make the shareholders nervous or pessimistic about Best Skis future prospects. The controller (your boss) came to the rescue with an accounting solution to the problem. He proposed that Best Ski declare a 10% stock dividend is merely a cosmetic increase in the number of shares, with no associated cash flow, either into or out of the company. However, he claimed that investors would never know the difference between a cash dividend and a stock dividend. The controllers suggestion was met with enthusiasm by the board of directors. The shareholder relations department is drafting a press release to announce the 10% stock dividend. Because if your accounting expertise, you have been asked to help

Jeffrey Croslen 4-13-2011 ACCT 3112 Ethical Cases with the wording of the memo. What wording would you suggest? I would say that the 10% stock dividend would return greater wealth to the shareholders of the company. Everyone benefits from the number of shares of stock for the company to invest has increased. The shareholders would receive new shares because the company would be getting more shares. I would tell the shareholders that they would have a greater value in the company since they now have more shares of stock. They will have greater rights and privileges in the company. Each shareholder will be able to do whatever they want with the shares. E. You have risen fast in Lam Tin industries and are now in charge of purchasing for the entire company. Lam Tin is a privately held company, and negotiations are currently under way for Lam Tin to be acquired by Kwun Tong Company, a large publically held firm. It is December, and the final negotiations with Kwun Tong, including the setting if the purchase price, will take place in February after the release of Lam Tins audited financial statements for the year ended December 31. You are puzzling over a strange request you received earlier today from Lam Tins vice president of finance. She visited you office and asked you to delay your normal December inventory purchases until the first week in January. You explained that this would result in a reduction of year-end inventories to less than half their normal yearend level. The vice president of finance seemed pleased with this information when she left the office. This request seemed fishy, and you pulled out your copy of Lam Tins annual report to check a hunch. Just as you suspected, Lam Tin has been using LIFO for many years and has built up a large LIFO reserve. If you delay the December purchases until January, Lam Tin will liquidate a large portion of its old LIFO layers, resulting in a big increase in reported profit for the year. It is possible that this artificial boost in Lam Tins profits might increase the price offered by Kwun Tong in the purchase of Lam Tin. Should you talk over your suspicions with the vice president of finance? With Lam Tins independent auditors? With the negotiation team from Kwun Tong? Explain. I would speak to the vice president of finance and tell him of the issue. I would also consult an independent and see what they would have to say on the issue. I would not tell the auditors of the specific situation. I would just ask them what they would do if that situation occurred. I would not however talk to the negotiation team of Kwun Tong because telling them would be a breach of confidentiality. I would however speak to a higher authority or report my company if the vice president of finance did not do anything about the situation. This is unethical and misleading to Kwun Tong. This misleading information could cause them to acquire a company that they may

Jeffrey Croslen 4-13-2011 ACCT 3112 Ethical Cases have had doubts about acquiring. Kwun Tong would soon find out about the cover up after acquiring Lam Tin and you would get in trouble for misrepresenting financial statements.