Question

Effective financial reporting depends on sound ethical behavior. Financial scandals in accounting and the businesses world have resulted in legislation to ensure adequate disclosures and honesty and integrity in financial reporting. A sound economy is contingent on truthful and reliable financial reporting.

Instructions:

Read the following scenario.

Answer the questions that follow. Your answers should result in a 2-3 page submission.

Reference back to your text book for guidance on how to think through the scenario.

Scenario:

Imagine you are the assistant controller in charge of general ledger accounting at Linbarger Company. Your company has a large loan from an insurance company. The loan agreement requires that the company’s cash account balance be maintained at $200,000 or more, as reported monthly. At June 30, the cash balance is $80,000. You give this update to Lisa Infante, the financial vice president. Lisa is nervous and instructs you to keep the cash receipts book open for one additional day for purposes of the June 30 report to the insurance company. Lisa says, “If we don’t get that cash balance over $200,000, we’ll default on our loan agreement. They could close us down, put us all out of our jobs!” Lisa continues, “I talked to Oconto Distributors (one of Linbarger’s largest customers) this morning. They said they sent us a check for $150,000 yesterday. We should receive it tomorrow. If we include just that one check in our cash balance, we’ll be in the clear. It’s in the mail!”

Questions

What is the accounting problem that the Linbarger Company faces?

What are the ethical considerations in this case? Provide rationale for why these are ethical considerations.

What are the negative impacts that can happen if you do not follow Lisa Infante’s instructions to wait one more day to post the balance?

Who will be negatively impacted if you do comply? Provide a rationale for why these individuals will be impacted.

What is one alternative that you could pursue in this scenario? Support your recommendations with information you learned in this class.

Answer 1

Problem with the cash flow, effects of manipulation and other way to do it ethically:

1. Here, the main accounting problem the company facing is the error of principle where the company is accelerating the cash flow only just to avail loan resulting its decrease of cash flow for the following year.

2.This can be identified by the terms undergone with the customer(Oconto Distributor-in the case) previously and why he is pushed to pay the bill in advance or whatever the criteria is.

3. Any person who is affecting the decision will be effected here in the case. From the manager to the CPA who is responsible for proper audit bares the crisis.

4. The alternative way to do it may be by alternating the terms of the agreement like changing the discount rates or fast payment incurring certain amount of benefits or something like that might add on to it in an ethical way.

5. Keeping the additional day might not be possible as only the journal entry is allowed to be posted that too for an element to be revalued otherwise, the books are not allowed to reopen and this can be easily identified by the external auditor sent by the insurance company.