Answer to Cases
Case 1
Requirement 1
The fundamental ethical issue in this situation is letting the financial
statements tell the truth about the company’s performance for the past
year. Performance was bad, and the financial statements should present a
bad picture of the company.
Requirement 2
The proposal to transfer personal assets temporarily to the company
violates the spirit, if not the letter, of the entity concept. The president
implies that these assets can be transferred back to him at will, and the
“investment” appears designed to make the company’s financial position
appear better than it is. This is dishonest and unethical.
The request to “shave expenses” violates the reliability principle. The
president wants the accountant top understate expenses in order to
convert a loss into a reported income. This is dishonest and unethical.
The Code of Professional Conduct requires honorable behavior, moral
judgments, and integrity of accountants. “Cooking the company’s books”
to paint an unduly positive picture of a business violates all three
requirements of the Code.
Case 2
The ethical issue is whether Neighborhood Chest is taking advantage of
the bank’s generosity.
Students who approve of the Community Chest action can point out that
the bank allows Neighborhood Chest to overdraw its cash balance. In this
view, Neighborhood Chest is merely using a privilege the bank has
granted. Most banks are civic-minded and are relatively generous with
charitable organizations.
Students who disapprove may argue that Neighborhood Chest is using the
bank’s money without adequately compensating the bank – a subtle form
of stealing. In this view, Neighborhood Chest should curtail its spending
until it has the money to cover its expenditures and maintain a positive
balance. Alternatively, Neighborhood Chest could sign a note payable to
borrow the needed money. The related interest is the bank’s
compensation.
The bank is the key player in this case. Whether the bank approves or
disapproves of the Neighborhood Chest overdrafts is critical to the ethical
decision. Approval by the bank turns the overdrafts into a gift to
Neighborhood Chest. Disapproval by the bank would no doubt be
communicated to Mr. Alas.
Case 3
Requirement 1
The transactions – recorded as directed by Cruz – overstate the store’s
reported income by P49,300 (P26,000 – P18,000 + P5,300).
Requirement 2
It appears the Cruz wants to improve the store’s income in order to
borrow on favorable terms. Cruz’ action is unethical because he is
deliberately overstating the store’s reported income.
Cruz and his business associates would be helped by his unethical actions.
The business will need a bank loan, and perhaps the money would be
used to pay bills, expand the business, and so on. However, based on
Cruz’ lack of integrity shown in this case, the money may be destined for
Cruz’ own enjoyment. Regardless of its use, the money is obtained under
false pretenses.
The bank is harmed by Cruz’ actions. Lending money to Cruz under false
pretenses may lead the bank to charge an unrealistically low interest rate
that robs the bank’s owners of interest revenue. In the extreme, the public
is robbed if taxpayers wind up financing the bailout of a failed institution.
The recent savings and loan crisis is an example.
Requirement 3
Personal advice will vary from student to student. The purpose of asking
this question is to challenge students to take the high road of ethical
conduct by having nothing to do with Cruz’ scheme. The authors would
advise the accountant to take these actions, in order:
1. Refuse to take any part in Cruz’ scheme, explaining that the result is
overstatement of reported income and is therefore wrong.
Accountants are bound to standards of ethical conduct that these
actions violate.
2. To remain ethical, the accountant must be willing to lose his / her
job. It is better to protect one’s reputation even if that causes short-
term hardship.
Case 4
Requirement 1
Recording the transaction in the general journal (instead of in the cash
disbursements journal) does not cause an error in the financial
statements. If all journal entries are posted, the cash balance and the
amount of total expenses should be correct.
Tan wanted his transaction recorded in the general journal to avoid having
the company president review it in the cash disbursements journal.
Requirement 2
The ethical issue is the use of company money to pay Santos expenses.
Unless the designated officer of the company approves, having the
company pay Santos’ expenses amounts to stealing from the company.
Accounting plays this role: Tan uses accounting to conceal payment and
so to avoid the president’s disapproval of the reimbursement to Santos’
wife.
