Question

Charlie Brown, the controller for Kelly Corporation, is preparing the company’s income statement at year-end. He notes that the company lost a considerable sum on the sale of some equipment it had decided to replace. Since the company has sold equipment routinely in the past, Brown knows the losses cannot be reported as an unusual item. He also does not want to highlight it as a material loss since he feels that will reflect poorly on him and the company. He reasons that if the company had recorded more depreciation during the assets’ lives, the losses would not be so great. Since depreciation is included among the company’s operating expenses, he wants to report the losses along with the company’s expenses, where he hopes it will not be noticed.

Instructions

1. What are the ethical issues involved?
2. What should Brown do?

Short answer

In the given case, Brown is raising the expenses of the company to hide the material loss associated with the company’s activities.

Step-by-step solution

Meaning of Ethics

In accounting, ethics refers to the adherence to applicable rules, guidelines, and principles associated with accounting activities. Such ethics are issued by governing bodies to prevent the misuse of financial information.

Involvement of ethical issues

According to the situation mentioned above, the practice adopted by Brown is unethical because he is not following the full disclosure principle of accounting.

In addition, Brown is hiding material information from the external users of financial information and making manipulations in thebooks of accounts.

Responsibility of Mr. Brown

In the given situation, Mr. Charlie Brown should follow the accounting principles and accurately disclose the information associated with material loss.

In addition, Brown must disclose the loss in unusual items rather than increasing the depreciation expenses in the operating activities section of the income statement.