Question

Applying ethical standards

Ava Borzi is the new controller for Halo Software, Inc. which develops and sells education software. Shortly before the December 31 fiscal year-end, Jeremy Busch, the company president, asks Borzi how things look for the year-end numbers. He is not happy to learn that earnings growth may be below 9% for the first time in the company’s five-year history. Busch explains that financial analysts have again predicted a 9% earnings growth for the company and that he does not intend to disappoint them. He suggests that Borzi talk to the assistant controller, who can explain how the previous controller dealt with such situations. The assistant controller suggests the following strategies:

a. Persuade suppliers to postpone billing \(18,000 in invoices until January 1.

b. Record as sales \)120,000 in certain software awaiting sale that is held in a public warehouse.

c. Delay the year-end closing a few days into January of the next year so that some of the next year’s sales are included in this year’s sales.

d. Reduce the estimated Bad Debts Expense from 3% of Sales Revenue to 2%, given the company’s continued strong performance.

e. Postpone routine monthly maintenance expenditures from December to January.

Requirements

1. Which of these suggested strategies are inconsistent with IMA standards?

2. How might these inconsistencies affect the company’s creditors and stockholders?

3. What should Borzi do if Busch insists that she follow all of these suggestions?

Short answer

The strategies which are inconsistent are a, b and c. Creditors and stockholders are affected as they have wrong financial information. Borzi should look for the company who works ethically.

Step-by-step solution

Step-by-Step SolutionStep 1: Strategies which are inconsistent

A The goods are already received but postponing the recording the purchase will understate the liabilities of the company. This makes the strategy unethical and inconsistent.

B Software has not been sold, but recording the sales would be the unethical and inconsistent.

C Delay in the year end closing is also unethical and inconsistent

D The appropriate allowance for bad debts is very difficult judgement. So, the reduction of estimated bad debts expense strategy is not clear whether it is inconsistent with IMA standards.

E The postponement of monthly maintenance expenditure is not unethical or inconsistent.

Creditors and Stockholders affected by the inconsistencies

The inconsistencies will impact the financial statement of the business which will affect the external users such as creditors and stockholders of the financial statements of the business.

Stockholders believe the profitability of the company is good. This will result investors to hold back the stock which they might sell if they have the correct information.

Creditors may also grant the credit to the company which they might grant to the company when they have a correct information.

Borzi Should do

The controller of the company should resist the attempt to implement a, b and c and should gather more information about D. In some case, if the president declines to consider, then she should reconsider if she wants to work in this company or not.