Question

You are an accountant at Evil Corporation. Your company is working to expand operations to another state. The company asked you to prepare financial statements to present to the bank to obtain financing. The income statement you prepared shows a loss of $2,000 for the current fiscal period. When you presented the figures to your immediate supervisor, Mr. Lucifer Strong, he informs you that these figures will not fly. He tells you to go back to the income statement and include a $10,000 customer payment that has not yet been received. This customer has recently filed bankruptcy and it is not likely that Evil Corporation will ever receive the funds.

1. What would you do and why? Carefully explain your answer.

2. Assuming that you do change the income statement, will the balance sheet be incorrect? What about the statement of cash flows? Fully explain.

3. What are the consequences of your actions if you choose to provide fraudulent financial statements to the bank? How could the bank learn the truth?

Answer 1

1. It is certainly unethical to present the bank fraudulent statements to obtain a loan. The following are the alternatives available :

(i) Explain to your supervisor this is unethical and can put the company as well both of you at great risk in the future when the fraud is eventually found out.

(ii) Inform the supervisor's idea to his immediate supervisor to make him aware of the situation and can ask him to suggest an alternative.

(iii) To avoid animosity between yourself and your boss you can as well follow his instructions.

2. Adjsuting accounts will have the same consequence on all the financial statements. The income will show excess revenue of $10,000 and so will the net profit consequently. The balance sheet will tally since the accounts receivable gets converted to cash and the retained earnings will reflect the excess profit of $10,000. Similarly, the cash flow statements will show an excess cash profit and collection of accounts receivable to the extent of $10,000.

3. The customer has already filed for a bankruptcy which most likely is going to include the bank as well in the list of his non payment accounts. Also, when the collection is not ultimately made you might as well default on the bank repayment since you will have to write off the account. The bank reviews the financial statements of the client on a periodic basis and when it does a comparison of the original statements and the one with written off debts it will lead to suspicion and the fraud is ultimately found out.