Legality & Ethicality of Financial Accounting
Legality and Ethicality of Financial Reporting
Accounting professionals consider standard practices of accounting and board of accountancy rules when creating ethical standards. Accountants also consider state and federal laws. Ethics and the law works hand-in-hand therefore should be on the minds of those considering the commission of fraud. The Chief Financial Officer (CFO) of Excello, Terry Reed, was considering doing such by posting a $2.1 million transaction to raise year-end earnings.
Terry Reed, CFO of Excello, committed the unethical practices in this case. Reed had considered the $2.1 million transaction to collect the earnings from a sale that was not to occur until January 2011. By posting the transaction in December 2010, Reed would be able to boost the earnings for that year. According to the generally accepted accounting principles, Excello must record the sale in accordance with the revenue recognition principle. When the transaction has been recorded correctly by the GAAP, the accounting department must post the sale to accounts receivable until the product has been shipped. At that time, the transaction is posted to earned revenue. By recording the transaction in 2010, Reed is deceiving internal and external users of the financial reports. By posting in 2010, the inflation of earnings, Excello is at risk of defrauding shareholders, according to the Securities & Exchange Commission (SEC). Intentionally reflecting inaccurate information in financial statements breaks state and federal laws and breaks the codes of the Sarbanes-Oxley Act (SOX) of 2002.
Congress passed the SOX at the end of 2002, after WorldCom and Enron scandals, to prevent further fraudulent activities caused by publicly traded companies. SOX’s main goal requires internal and external control processes, thus preventing the fraud from occurring. SOX applies to the Excello case because reporting higher income for 2010 means Excello is defrauding shareholders, creditors, and
Accounting professionals consider standard practices of accounting and board of accountancy rules when creating ethical standards. Accountants also consider state and federal laws. Ethics and the law works hand-in-hand therefore should be on the minds of those considering the commission of fraud. The Chief Financial Officer (CFO) of Excello, Terry Reed, was considering doing such by posting a $2.1 million transaction to raise year-end earnings.
Terry Reed, CFO of Excello, committed the unethical practices in this case. Reed had considered the $2.1 million transaction to collect the earnings from a sale that was not to occur until January 2011. By posting the transaction in December 2010, Reed would be able to boost the earnings for that year. According to the generally accepted accounting principles, Excello must record the sale in accordance with the revenue recognition principle. When the transaction has been recorded correctly by the GAAP, the accounting department must post the sale to accounts receivable until the product has been shipped. At that time, the transaction is posted to earned revenue. By recording the transaction in 2010, Reed is deceiving internal and external users of the financial reports. By posting in 2010, the inflation of earnings, Excello is at risk of defrauding shareholders, according to the Securities & Exchange Commission (SEC). Intentionally reflecting inaccurate information in financial statements breaks state and federal laws and breaks the codes of the Sarbanes-Oxley Act (SOX) of 2002.
Congress passed the SOX at the end of 2002, after WorldCom and Enron scandals, to prevent further fraudulent activities caused by publicly traded companies. SOX’s main goal requires internal and external control processes, thus preventing the fraud from occurring. SOX applies to the Excello case because reporting higher income for 2010 means Excello is defrauding shareholders, creditors, and
Cited: Mintz, S. M. (2011). Ethical obligations and decision making in accounting (2nd ed.). New York: McGraw-Hill/Irwin.