Question

Imagine that you are one of three partners in an accounting firm. Five years ago, the firm was appointed as external accountants to a successful startup company, engaged to prepare year end accounts and tax returns. The startup had begun trading with a handful of employees but now has a workforce of 200, while still remaining below the size of company requiring a statutory audit. Due to your close relationship with the director/owner of the company and several of its staff, you find out that staff purchases of goods manufactured by the company are authorized by production managers, and then processed outside the accounting system. The proceeds from these sales are used to fund the firms holiday party. In the discussion forum, answer the following questions: Would this practice of omitting income from staff sales result in misleading financial statements? Is the practice dishonest? What should be your involvement? How should you act in order to protect your reputation, you firms reputation, and the reputation of your profession?

Answer 1

ANs:

Ans: Yes, of course this is wrong practice and will definitely result misleading of financial statements. As per accounting concept every debit will have credit that simply means if production is happening, it will have cost attached to it and that cost gets compensated when sales happen of these products and brings margin to the company, but when you absorb the cost of the product and do not account the sales, it is definitely misleading the financial statement, you are in a way understating the profit of the company bu not disclosing the sales, the government offices may treat it as an evasion of taxes.

This is definitely a dishonest practice as clearly explained above that this will trigger controversies like evasion of government’s taxes. Hence this has to be reported asap to the appropriate government offices.

I as an accounting firm would definitely bring this to the company's CFO, CEO and then would bring to government's notice and will take immediate action of correcting it in the financial statement. I will also take it up with audit committee and will recommend to stop this practice immediately.