Legality and Ethicality of Financial Reporting Essay

As the case of Excello Telecommunications is reviewed it terminate be seen that the chief financial officer was facing financial difficulties due to increase competition. In 2010 the earnings figure was non going to be met and this would produce touch on the bonuses, stock picks, and the sh be prices of the Excello stocks. After discovering a large deal that was pending until the lode could be make for the following grade the chief financial officer asked the corporation controller to bring forth a charge to capitalize on the barter in the current family so that the budget shortfall could be met. The only route to accomplish the task was to cause roughly the rules of accounting. The in ten-spott to husking a way around the rules presents accomplishable intelligent outlets. This case mess be evaluated by the Sarbanes-Oxley Act and the AICPA and we look at the financial narrationing standards and ethics involved.The chief financial officer of Excello, Terry Reed , discovered that the political party made a sale of $1.2 trillion dollars on celestial latitude 20, 2010 but it could non be recorded until January 11, 2011 because the purchasing companys store capacity could not obtain the equipment. After this discovery Reed ascertain that the monetary shortfall for 2010 could be understand if the company could record the sale for 2010 rather of in 2011. The Controller, Marty Fuller, for the company approached the accounting discussion section and there were three possible ways found to work around the dilemma. The kickoff was to budge the harvest-feast to an off-site warehouse that was owned by Excello by celestial latitude 31 and hold it there until January 11 when it could be stationped to the purchaser. The arcsecond would be to transfer the product to the purchaser by December 31 and brook a large refund upon return. The deuce-ace option is to offer a ten percent push away to the purchaser if they accept the product by D ecember 31.In reviewing this case it stand be seen that there are legal issues that are involved. The controller of the company is amply aware of the rules of accounting and is volitioning to work around them at the request of the CFO practicing earning management in an effort to pass on the company financial object. Excello cannot legally report the income of the $1.2 million dollar sale in 2010 due to the fact that it volition not be shipped until 2011. If the sale is recorded the way the CFO wants it to appear the company would be by artificial means inflating the profits for the year 2010. If the sale is recorded in 2010 it will be overstated earnings and will go bad the generally accepted accounting principles for tax information. The taxation enhancement recognition rule is stated so that the goods are to be delivered to the emptor beforerevenue can be recorded. Falsely account this will artificially flip ones lid the revenue and is deceiving to the shareholders . The Sarbanes-Oxley Act (SOX) was designed so that it could prescribe the rules and regulations and appropriately guide companies in coverage their financial statements and performing audits.The CFO for Excello inflexible to use earning management practices and falsely inflate the financial statement from 2010 in nine to meet the earnings estimate it and in doing so breached Section 302 of the SOX codes. Section 302 of the SOX is the incorporated Responsibility for Financial Reports and states This section requires the franchise of periodic reports filed with the SEC by the chief executive officer and CFO of cosmos companies. (Mintz & Morris, 2011) The reports that will be filed by Excello for the 2010 year with the SEC will contain false information and in doing so will violate the code. The goal of the SEC is to protect activities and interests of investors, lenders, and companies. The artificial swelling for earned revenue in 2010 by Excello causes risks to the investor s, lenders, and shareholders as it is fraudulent information that is inform and is an wrong practice. The unethical financial account that Excello call fored in this case goes against the AICPA Code of passe-partout Conduct.The AICPA holds Certified Professional Accountants to a richly ethical standard. As the Excello Company reports revenue prematurely it violates several of the principles that the AICPA is built on. The debate of the decision to prematurely record $1.2 million dollars was based on bonuses, stock, and shareholders and was not through with(p) in the interest of the habitual. This decision could stick affected the integrity of the company as the trust to the public, clients, and lenders would be broken. The decision to artificially inflate the profits for the year 2010 proves to be unethical in the terms of the AICPA. put the bonuses, stock options, and the share prices ahead of the public interest is unethical behavior and impossible by the AICPA, genera lly accepted accounting principles, or SEC. The accounting plane section for Excello came up with three ways that the rules of the GAAP could be bent in arrangement to accommodate written text profits before than appropriate. The first was to ship to an offsite warehouse owned by Excello by December 31, 2010 and ship it again on the requested January 11, 2011 date.The second was to transfer the product to the vendee by December 31 and offer a full refund if retuned to Excello. The third option was to offer the buyer a ten percent discount to take theproduct by December 31, 2010. Of the three options the trump out alternative seems to be offering a discount if the customer takes the product by December 31, 2010. Giving discounts to a buyer is not an uncommon practice and is not an illegal practice that is defined by the GAAP or the SEC. If the product is delivered to the buyer by the December 31, 2010 deadline the sale will be legitimate and the $1.2 million dollars can be appr opriately recorded in 2010. Transferring the product to the buyer before January in fix to make the earnings estimate and procure the bonuses and stock options is not the or so ethical reason but does not appear to be illegal.The CFO of the company asked the controller to find a way around the GAAP regulations in order to record a large sale by the end of the 2010 year that would have been otherwise legally recorded in 2011. After reviewing the GAAP regulations it is seen that recording a sale before the buyer takes possession is a fraudulent recognition of profit. The adjoin of recording and recognizing revenue before it is rattling due is illegal in the look of the SEC. This artificial inflation of profits can affect the public and investors in the company. The unethical behavior of fraudulent profit recording goes against the AICPA Code of Professional Conduct as well because it puts the company ahead of the public interest.There were three options given by the accounting de partment to solve the issue of the year-end profit earnings. Of the three options presented, the third was to offer a discount in order for the customer to take address of the product by the deadline allowing for profits to be recorded legally. It is understandable that a company needs to make the earnings estimate, even so it should be done legally and no CFO or CPA should consider bending the rules set forth by the GAAP. The idea of trying to work around the rules and guidelines set forth by the GAAP is unethical behavior.ReferencesMintz, S. M., & Morris, R. E. (2011). Ethical Obligations and decision devising in accounting (2nd ed.). New York, NY McGraw-Hill/Irwin.