Question

Larry has been the chief financial officer (CFO) of Maxima Auto Service for the past 10 years. The company has reported profits each year it's been in business. However, this year has been a tough one. Increased competition and the rising costs of labor have reduced the company's profits. On December 30, Larry informs Robert, the company's president and Larry's closest friend for the past 10 years, that it looks like the company will report a net loss (total expenses will be greater than total revenues) of about $50,000 this year. The next day, December 31, while Larry is preparing the year-end reports, Robert stops by Larry's office to tell him that an additional $75,000 of revenues needs to be reported and that the company can now report a profit. When Larry asks about the source of the $75,000, Robert tells him, “Earlier in the month some customers paid for auto services with cash, and with this cash I bought additional assets for the company. That's why the $75,000 never showed up in the bank statement. I just forgot to tell you about this earlier.” When Larry asks for more specifics about these transactions, Robert mumbles, “I can't recall where I placed the customer sales invoices or the purchase receipts for the assets, but don't worry; I know they're here. We've been friends for a lot of years and you can trust me. Now, let's hurry and finish those reports and I'll treat you to dinner tonight at the restaurant of your choice.” Required: Discuss the ethical dilemma Larry faces: What is the issue? Who are the parties affected? What factors should Larry consider in making his decision?

Answer 1

Ethical Dilemma

Larry (The Chief financial officer ) of company is in ethical dilemma to report a profit of $75000 on account of cash services to customer as his friend and president of company Robert said or not because there is no evidence to show customer sale service or purchase of equipment.

Issue While preparing year end report by Larry(CFO), his friend and president of company Robert said him to report a profit on account of cash service to customers and record asset from receipt of cash.But there is no customer sale invoice or receipt of asset on the basis of which transaction can be recorded.$75000 is also not shown in bank statement.

Parties affected  

• ​Chief financial officer who prepare year end report.
• Shareholders Owners of financial statement who use the financial information for decision making)   
• Third party (banker) Provide finance to company on basis of report of company.
• Public Make decision to invest or not in company on the basis of this information

Consideration while making decision.

• Effects on financial transaction - Profit of company and balance of asset account increased by $75000
• Any invoice or any document which shows existence of transaction.
• Inquiries from vendor of asset from where Robert has purchased the asset.