Question

Die Hard Company is a pesticide manufacturer. Its sales declined greatly this year
due to the passage of legislation outlawing the sale of several of Die Hard's chemical pesticides.
In the coming year, Die Hard will have environmentally safe and competitive chemicals to replace
these discontinued products. Sales in the next year are expected to greatly exceed any
prior year's. The decline in sales and profits appears to be a one-year aberration. But even so,
the company president fears a large dip in the current year's profits. He believes that such a dip
could cause a significant drop in the market price of Die Hard's stock and make the company
a takeover target.

To avoid this possibility, the company president calls in Becky Freeman, controller, to discuss
this period's year-end adjusting entries. He urges her to accrue every possible revenue and
to defer as many expenses as possible. He says to Becky, "We need the revenues this year, and
next year can easily absorb expenses deferred from this year. We can't let our stock price be
hammered down!" Becky didn't get around to recording the adjusting entries until January 17,
but she dated the entries December 31 as if they were recorded then. Becky also made every
effort to comply with the president's request.

Instructions
(a) Who are the stakeholders in this situation?
(b) What are the ethical considerations of (1) the president's request and (2) Becky's dating
the adjusting entries December 31?
(c) Can Becky aggressively accrue revenues and defer expenses and still be ethical?

Answer 1

(a) Who are the stakeholders in this situation?

• The company president,
• The controller, Backy
• The present and potential shareholders of the entity.

(b) What are the ethical considerations of (1) the president's request and (2) Becky's dating
the adjusting entries December 31?

• President may well be asking Backy to increase the reported profit in an attempt to avoid this temporary situation. But it is not an ethical behaviour.
• It is acceptable for Becky's to ensure that all assets, liabilities, income and expenses are recorded in the correct accounting period. It becomes unacceptable, and unethical, if Becky recognises other assets, liabilities which do not legitimately reflect the entity’s performance and financial position in the current period. Nevertheless, there are several techniques which Backy could use to manipulate (or ‘massage’) the profit figure e.g. changing the method of calculating depreciation, or changing useful lives of assets. These changes in techniques may be generally acceptable, and quite legal; but are they ethical? It becomes unethical if the president places so much pressure on backy to carry out adjustments that she believes should not be made, on the grounds that the results for the period would become distorted.

(c) Can Becky aggressively accrue revenues and defer expenses and still be ethical?

It is ethical to accrue revenue and defer expenses if recording is in accordance with accounting standards. Accrual of revenue is necessary if services are already performed for clients, however cash was not yet received. Deferral of expenses are appropriate whenever there were advance payments made for a particular service which should only be expensed out until performance of the said service.

But in this case beckey is aggressively accrue revenues and defering the expenses and are not ethical.