Question

You are an assistant in the accounting department of Thunderduck Shoes, a small retailer. The company has a loan that requires the company to maintain a minimum cash balance of $75,000, as reported on its year-end balance sheet. The cash balance in the general ledger was $80,000 prior to recording payroll for salaries of $15,000 that were earned in the current month.

Your supervisor says the only way Thunderduck Shoes can meet its loan requirement is to delay recording the December payroll journal entryl until January of the next year. This would be pretending as if the payroll checks were not issued until after year-end.

You questioned whether this would be ethical. The supervisor’s reply was, “Well, we don't really have a choice. Either we do this, or we violate the terms of the loan agreement and possibly be forced to repay the loan immediately. That could put us out of business. Think of all the people who would lose their jobs! Just wait to record the December payroll journal entry until January —probably before many of our employees even get the checks we have written to them.”

Required:

Write a 1-2 page technical business memo addressed to your mentor at work discussing the ethical decision you must make. Be sure to consider and discuss the following questions.

• Which elements of the fraud triangle are present in this situation? Which type of fraud is in consideration?
• Who might suffer in the short term if you go along with your supervisor's request? What might happen in the future if you go along with the request this time? If you do not go along, who might suffer in the short term and what could be the long-term consequences?
• You want to be loyal to your supervisor but honest to others who rely on your work. As an accounting assistant, which of these concerns should be most important? Why?
• What alternative courses of action can you take? Which of these is “best” given the circumstances?

Criteria:

Your business memo should briefly summarize the issue to your mentor at the company that works in a different department. The memo should discuss in detail the ethical considerations as you make your decision. Be sure to use your own words to paraphrase the information.

Answer 1

Req. 1

If you go along with your supervisor’s request, no one is likely to suffer in the short-term. You will satisfy your supervisor, which may lead to favorable performance evaluations for you. Your bank will not know about this manipulation, so it is not likely to adversely affect the bank in the short term. However, there may be several adverse long-term consequences of this act, as discussed below.

First, your supervisor may begin to think that you are able and willing to take shortcuts and falsify information to produce pleasing financial results. Many frauds start out by slightly bending the rules, but then escalate to larger and more dishonest acts. You do not want to allow yourself to get caught on this “slippery slope.” Second, your bank may be adversely affected if it turns out that this is the beginning of financial difficulties for your company. Possibly, the delayed payment from your major customer is a sign of financial trouble in the industry or economy, which may lead your company to experience problems collecting from other customers. This could snowball and cause financial hardship for your own company. Should this unravel further, your bank may begin asking questions about why your company had been able to maintain compliance with loan requirements earlier and possibly discover that your dishonest action contributed to a false impression that your company was financially secure. It is possible that this situation could lead you to be identified as the culprit responsible for misstating the financial statements, and conclude with a prison term and fines being levied on you.

If you do not go along with your supervisor’s request, you might suffer in the short term because the supervisor might think you are not a “team player.” In the long run, however, you are unlikely to regret doing the right thing.

Req. 2

As an accounting assistant, your primary responsibility is to provide reliable information on which decisions can be based. Honesty should be more important than loyalty.

Req. 3

One course of action is to go along with the supervisor’s request. For reasons stated in requirements 1 and 2, this is not the “best” alternative. A more appropriate alternative is to account for the checks properly (as a reduction in Cash and Accounts Payable). Should the bank call the company for having violated its minimum cash balance requirement, the situation could be explained to the bank and allow the bank to see that the company’s actions recognize the importance of honest financial reporting. This conversation should include a discussion about the limitations of the bank’s reliance on only one measure of the company’s financial condition (cash) and the need for considering other performance measures (such as the level of accounts payable and current liabilities) in relation to the level of cash and other current assets.