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Chapter 1: Question 13CA-d (page 25)

ETHICS (Rule-Making Issues) When the FASB issues new pronouncements, the implementation date is usually 12 months from date of issuance, with early implementation encouraged. Karen Weller, controller, discusses with her financial vice president the need for early implementation of a rule that would result in a fairer presentation of the company’s financial condition and earnings. When the financial vice president determines that early implementation of the rule will adversely affect the reported net income for the year, he discourages Weller from implementing the rule until it is required.

Instructions:Answer the following questions.(d) Which stakeholders might be affected by the decision against early implementation?

Short Answer

Expert verified

Lenders and investors are the ones to be most affected by the decision against early implementation.

Step by step solution

01

Meaning of Stakeholders

An individual or a company that invests in and takes interest in a business is known as a stakeholder for that business entity. Stakeholders need an in-depth knowledge of the business to make their investment decisions.

02

Explanation

The lenders and investors are dependent on the financial statements for ascertaining the firm's financial condition, so they are the ones who gain the most through early implementation. However, the stockholders who are contemplating the sale of stock may have to bear the loss of the early implementation as it lowers net income. Likewise, it may also lower the stock value.

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Most popular questions from this chapter

What are some of the major challenges facing the accounting profession?

Economic consequences of accounting standard-setting means:

(a) standard-setters must give first priority to ensuring that companies do not suffer any adverse effect as a result of a new standard.

(b) standard-setters must ensure that no new costs are incurred when a new standard is issued.

(c) the objective of financial reporting should be politically motivated to ensure acceptance by the general public.

(d) accounting standards can have detrimental impacts on the wealth levels of the providers of financial information.

How are FASB preliminary views and FASB exposure drafts related to FASB “statements”?

ETHICS (Financial Reporting Pressures) Presented below is abbreviated testimony from Troy Normand in the

WorldCom case. He was a manager in the corporate reporting department and is one of five individuals who pleaded guilty. He is

testifying in hopes of receiving no prison time when he is ultimately sentenced.

Q. Mr. Normand, if you could just describe for the jury how the meeting started and what was said during the meeting?

A. I can’t recall exactly who initiated the discussion, but right away Scott Sullivan acknowledged that he was aware we had

problems with the entries, David Myers had informed him, and we were considering resigning.

He said that he respected our concerns but that we weren’t being asked to do anything that he believed was wrong.

He mentioned that he acknowledged that the company had lost focus quite a bit due to the preparations for the Sprint

merger, and that he was putting plans in place and projects in place to try to determine where the problems were, why the

costs were so high.

He did say he believed that the initial statements that we produced, that the line costs in those statements could not

have been as high as they were, that he believed something was wrong and there was no way that the costs were that

high.

I informed him that I didn’t believe the entry we were being asked to do was right, that I was scared, and I didn’t want

to put myself in a position of going to jail for him or the company. He responded that he didn’t believe anything was wrong,

nobody was going to be going to jail, but that if it later was found to be wrong, that he would be the person going to jail,

not me.

He asked that I stay, don’t jump off the plane, let him land it softly, that’s basically how he put it. And he mentioned that he

had a discussion with Bernie Ebbers, asking Bernie to reduce projections going forward and that Bernie had refused.

Q. Mr. Normand, you said that Mr. Sullivan said something about don’t jump out of the plane. What did you understand him

to mean when he said that?

A. Not to quit.

Q. During this meeting, did Mr. Sullivan say anything about whether you would be asked to make entries like this in the future?

A. Yes, he made a comment that from that point going forward we wouldn’t be asked to record any entries, high-level late

adjustments, that the numbers would be the numbers.

Q. What did you understand that to be mean, the numbers would be the numbers?

A. That after the preliminary statements were issued, with the exception of any normal transaction, valid transaction, we

wouldn’t be asked to be recording any more late entries.

Q. I believe you testified that Mr. Sullivan said something about the line cost numbers not being accurate. Did he ask you to

conduct any analysis to determine whether the line cost numbers were accurate?

A. No, he did not.

Q. Did anyone ever ask you to do that?

A. No.

Q. Did you ever conduct any such analysis?

A. No, I didn’t.

Q. During this meeting, did Mr. Sullivan ever provide any accounting justification for the entry you were asked to make?

A. No, he did not.

Concepts for Analysis 27

Q. Did anything else happen during the meeting?

A. I don’t recall anything else.

Q. How did you feel after this meeting?

A. Not much better actually. I left his office not convinced in any way that what we were asked to do was right. However, I did question myself to some degree after talking with him wondering whether I was making something more out of what was really there.

Instructions

Answer the following questions.

(a) What appears to be the ethical issue involved in this case?

(b) Is Troy Normand acting improperly or immorally?

(c) What would you do if you were Troy Normand?

(d) Who are the major stakeholders in this case

What organizations are the two key international players in the development of international accounting standards? Explain their role.

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