Question

Answer the questions by 3 paragraphs:

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?

Each analysis will include a minimum of four sections:

1.  Ethical situation and people who will be affected

2. Options for alternative courses of action

3. The impact of each option on the stakeholders

4. Decision and reasoning underlying the decision.

Answer 1

Answer :

Larry should understand that if he reports the additional $75,000 of revenue, the company will no longer report a loss, but a profit of $25,000 (ignoring any tax effects). Thus, the company's financial strength will be overstated.

Robert, the company's president, benefits from false reporting by maintaining the company's profitable appearance. The incentives could be income bonus plans, a desire to please stockholders, meeting analysts' earnings forecasts for the company, or maintaining good standing with creditors. Larry benefits from false reporting by keeping his friendship with Robert, keeping his job for the longer-term, and getting a free dinner tonight. However, if the false reporting is discovered by authorities, both parties face legal penalties and suffer reputational damage.

As the accountant, Larry should understand that his responsibilities are to accurately record and report the company's activities. Larry must be aware that Robert may have incentives for falsely reporting to Larry about the additional revenue. Without source documents, an important step in the measurement process, Larry should not record any transactions.