Question

You are auditing the financial records of a com- pany and are reviewing the depreciation compu- tations. Included in the assets are two buildings and numerous machines in each building. One of the build- ings is used to manufacture components of toys and the other for assembly and packing, using the manufactured compo- nents as well as others purchased from suppliers. You see that the company uses straight-line depreciation over 40 years for the buildings and 20 years for the machinery. You decide to ask the CFO about these calculations, and he replies, “We use 40 years for the buildings because it is close to the 39 we use for tax. And our best guess is that we will replace the machines twice while we use the building. And the method is easy to use and most companies use it, don’t they? Or have things changed that much since I was in college?” You feel as if you have annoyed the CFO with your questions, so you decide to leave. As you walk back to your office, you recall from earlier in the audit that the company uses FIFO and LIFO for differ- ent segments of its inventory and that all top-level managers receive bonuses based on reported income.

Required From financial reporting and ethical perspectives, what depreciation methods and lives would you recommend?

Answer 1

THE COMPANY USES STRAIGHT-LINE DEPRECIATION OVER 40 YEARS FOR THE BUILDINGS AND 20 YEARS FOR THE MACHINERY.  EARLIER IN THE AUDIT THAT THE COMPANY USES FIFO AND LIFO FOR DIFFER- ENT SEGMENTS OF ITS INVENTORY AND THAT ALL TOP-LEVEL MANAGERS RECEIVE BONUSES BASED ON REPORTED INCOME.THIS MOSTLY HAPPENS BECAUSE OF SOME THE MOST COMMON ETHICAL CONCERNS.

THEY ARE AS FOLLOWS:

1. FINANCIAL REPORTING AND ANALYSIS: FAKING THE NUMBERS-THE MOST COMMON ETHICAL CONCERN WITHIN REPORTING AND ANALYSIS IS “FAKING THE NUMBERS“.IN DEPRECIATION ALSO AN ORGANIZATION WHO FAILS TO GIVE EXACT REPORT WILL CAUSE THE ORGANIZATIONS REPUTATIONAL AND FINANCIAL POSITION AT THE END.

1. ASSET MISAPPROPRIATION-CREATING A DOWNWARD SPIRAL OF EVENTS FROM A MONETARY LOSS TO ULTIMATE ORGANIZATIONAL FAILURE. PROPER ASSET AND DEPRECIATION MANAGEMENT IS VERY IMPORTANT OTHER WISE IT WILL AFFECT THE ETHICAL PERCEPTIVE.
2. DISCLOSURE CONCERNS-ALTHOUGH IT IS AN ISSUE TO OVERLY DISCLOSE, IT IS ALSO AN ISSUE TO DISCLOSE TOO LITTLE. IF A LOSS HAPPENS, THEY MAY CHOOSE TO HIDE THIS LOSS FROM POTENTIAL INVESTORS TO CREATE A FACADE OF SUCCESS.
3. EXECUTIVE FOCUSING-ANOTHER ETHICAL CONCERN FOR THE HEALTHCARE INDUSTRY LIES IN THE ORGANIZATION BECOMING TOO FOCUSED ON THE EXECUTIVE OR TOP LEVEL MANAGERS.THEY ARE ACTING IN FAVOR OF THEM AND THAT MAY LEAD TO ETHICAL ISSUES..

5. NO DIRECT CHAIN OF COMMAND-EVERY INDUSTRY MUST HAVE A PROPER CHAIN OF COMMAND IN ORDER TO PROVIDE THE BEST FINANCIAL REPORTING AND ANALYSIS.

ORGANIZATIONS WITHIN THE HEALTHCARE INDUSTRY SHOULD STRIVE TO HAVE COMMAND CHAINS THAT ARE EFFECTIVE AND HIGHLY TRAINED. IF AN EMPLOYEE NOTICES A PROBLEM WITHIN THE ORGANIZATION’S REPORTING, IT SHOULD BE REPORTED AND FOLLOW THIS CHAIN TO ENSURE SOMETHING IS DONE.

WITHIN A CHAIN OF COMMAND, FINANCIAL REPORTING, DEPRECIATION AND ANALYSIS ISSUES CAN GO UNNOTICED, CREATING FURTHER DAMAGE TO THE ORGANIZATION’S ASSETS.