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Marylynn Huggins

Scott Anderson
Jessica Tucker
ACCT 2540 Group Ethics Paper
January 22, 2015

First Mates Wholesale Boating Supply Company: Do or Dont?

We have been assigned to read through information about the First Mates Boating Supply
Company and decide whether the suggestions made by employees fit within the accounting
standards and ethics of GAAP. We will be examining five ideas presented by the business unit
leaders and present our evaluation of the ethical basis of each. We will also take a look at two
actions that have been in place during the last year and determine how ethical those decisions
were. Finally, we will address three ideas of how we can help others within our business
organizations, including those unfamiliar with accounting, practice ethical behavior in financial
reporting.

Nick Pittman, president of First Mates Wholesale Boating Supply Company (FMWBS) sent an
email to the leaders of the Lake Products and the Deep Sea Fishing units to inform them of a
likely $0.30 shortfall in the companies projected earnings per share. In this email he expected
efforts to be made to find costs that could be reduced, or revenues that could be booked to help
fix the situation. The unit leaders presented the following suggestions of how the Company could
makeup this shortfall and meet the projected $3.60 earnings per share for the shareholders. Most
of the suggestions made would add revenues, or reduce costs, but they are just not accepted
ethical business practices. Some of the suggestion are even against the law.1

FMWBS, Darden Business Publishing, pg. 1

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Listed below are five of the proposed suggestions and reasons they are either not ethical methods
or dont meet the GAAP standards of doing business:
Jeremy Tolmit, head of promotions and marketing for Lake Products suggested;
Ill make sure next quarters automatic marina replenishment orders get shipped before the end
of the quarter instead of waiting the usual 10 to 20 days into the new quarter.2
This is not an appropriate ethical business practice. Mr. Tolmit needs to be educated in the
possible future business and accounting problems this action could produce. His suggestion
would definitely add to accounts receivable on the balance sheet as well as cost of goods sold
expense and revenues on the income statement for the quarter, but changing the normal shipping
dates would be presumptuous and unprofessional. This act has the potential to create problems
with customers who would be caught off guard with a premature shipment of goods that they
may not have room for. That can impact this companys business in the future. These changes
are unacceptable.

John Newell, vice-president of Lake Products proposed;


Jeremy, how about calling a few of our best customers to see if they are willing to increase the
orders we have on hand from them under an arrangement where we invoice them now at a
discounted price for the additional items, and we hold the goods until they need them?3
At first glance this may sound like a reasonable idea, however, what John Newell may not
understand about this suggestion is that the SEC has issued certain standards when it comes to
revenue recognition. Our Intermediate Accounting4 textbook discusses this principle and the
criteria that needs to be satisfied before revenue can be realized.
1. Persuasive evidence of an arrangement exits.
The invoice satisfies this element.
2. Delivery has occurred or services have been rendered.

FMWBS, Darden Business Publishing, pg. 3-4


FMWBS, Darden Business Publishing, pg. 4
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Intermediate Accounting, McGraw-Hill/Irwin Publisher, pg. 233
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3. The sellers price to the buyer is fixed or determinable.


The price, even though a discount is offered, can be considered determined.
4. Collectability is reasonably assured.
To be considered among best customers would most likely be an indication that
collection is reasonable.
As can be seen only three of the four criteria will be met if this suggestion is carried forward,
thus it does not meet GAAP standards and would be unethical to implement.

Hank, the back office guru at Lake Products said;


we are getting ready to ship a fairly large quantity of diverse product items weve offered to a
southwest network of marinas for their inspection in hope that they will choose to carry some or
all of our products. We have been trying to sign them as an ongoing customer for months. Im
pretty sure theyll like what they see, so I feel comfortable booking those shipments as sales.5
Hank might be the back office guru, but he doesnt appear to be familiar with GAAP accounting
standards. Shipping product to a potential customer for inspection and accounting for them as a
sale, is again addressed as part of the GAAP revenue recognition principles. From the sounds of
Hanks statement this involves potential customers not already proven customers, so the
collectability as well as return percentages are unknown even though Hank feels optimistic.
Therefore, the shipments would need to be accounted for using the installment sales method or
cost recovery method; meaning that the revenue can only be recognized upon receipt of payment.
Hanks lack of accounting expertise could be seen by some as not only unethical behavior, but
also totally unprofessional, and even an intentional move to go against regulations and standards.

Molly Jackson, who works in the accounting department at the Deep Sea business unit, has
said, I have a host of ideas whose time has come to help. These are easy to do, legitimate,
and they can help us.6

5
6

FMWBS, Darden Business Publishing, pg. 4


FMWBS, Darden Business Publishing, pg. 5

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First, I propose we relax our credit screening for new customers to expand our customer base.
Wed just have to commit to closely monitoring their subsequent payment patterns in order to
justify not increasing this years uncollectible accounts estimate again.7
Changing the companys credit screening policy for new customers is legitimate, but it will put
in question criteria #4 of the previously cited revenue recognition standard. It would be ethical
to follow the installment sales method which recognizes revenue and costs only when cash
payments are received.8 Changing the credit screening policy without increasing the
uncollectible accounts estimate could be seen as a violation of her professional and ethical duties
according to standard accounting practices. In our opinion, Molly needs to learn more about
ethics in accounting.

Jeff McCain, head of marketing with the Deep Sea Business, suggests using a technique that
the company his buddy works at uses to boosts their sales.
The company boosts sales with new customers that are hesitant to place large orders with them,
by going through the normal purchase order/shipping/invoicing/sales recording process and then
issues a supplemental letter to the customer detailing some specially negotiated sales return
policies. In some situations new customers are more willing to take the plunge and place larger
orders, and even existing customers were more willing to order certain product lines they were
previously hesitant to acquire. Jeff could think of four Deep Sea customers he could contact
with this approach.9
This idea is not only an unethical business practice, but it violates laws setup by the Federal
Trade Commission. Offering this type of incentive only to certain customers is against the law.
All customers would have to have the same return opportunity for this to be legal. This practice
is not ethical business practice and is unacceptable. How are the existing customers going to act
when they find out about this special return policy, and why werent they offered the same deal?

FMWBS, Darden Business Publishing, pg. 5


Intermediate Accounting, McGraw-Hill/Irwin Publisher, pg. 233
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FMWBS, Darden Business Publishing, pg. 6
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The ideas that are being presented by the business leaders of the Lake Products and Deep Sea
Fishing units of First Mates Wholesale Boating Supply Company appear on the surface to be
very creative. Each of the suggestions would be helpful in solving the $0.30 shortage of this
years earnings per share figure, and the books would look as though the company was
legitimately meeting stockholders expectations. The problem with these suggestions proposed
by the unit leaders is that they are unethical, unprofessional, and against relevant laws,
regulations and technical business standards. They would alter the true condition of the business
and would not be a fair representation of the companys financial situation.

Now lets take a look at two of the actions that Miriam Arthurs Deep Sea fishing unit put into
place at the end of last year and discuss their merits:

One of the actions taken by Arthurs financial team involved delaying some major customer
shipments until this years first quarter.10 Without further information its difficult to assess
whether this action was ethically correct and followed GAAP standards. Was the revenue from
those shipments recognized last year or did it follow into the new year with the timing of the
shipments? While on the surface that would indicate an increase in gross profit and net income
for the quarter, but was it done with the knowledge of the customers involved? Was customer
satisfaction considered an afterthought in order to benefit the numbers? If so it would surely
have a negative effect on the satisfaction of their major customers which could impact the
company in a loss of revenue down the road. The possible effect of this action on the current
years financials would be a manipulation of the accounting process and would be looked upon
as unethical by GAAP standards.

Another action Arthurs team took at year end was to prepay and expense the cost associated
with a major trade show that they sponsor in the current year.11 To fully implement the matching
principle, that requires all expenses to be recognized during the same period in which they occur,
10
11

FMWBS, Darden Business Publishing, pg. 5


FMWBS, Darden Business Publishing, pg. 5

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the costs for the trade show should be recorded within the quarter the event takes place. Our
Intermediate Accounting12 textbook explains how to handle expenses incurred, without regard to
related revenues.
Sometimes costs are incurred, but it is impossible to determine in which period or
periods, if any, related revenues will occur. Like with the trade show FMWBS
sponsors. Its difficult to determine when, how much, or even whether additional
revenues occur as a result of that particular [event]. As a result, we recognize [trade
show] expenditures as expenses in the period incurred.
This action was definitely not ethical and wouldnt be cohesive with accrual accounting
procedures. No matter if the figures are favorable or not to the company, the financial statements
have to be as precise and accurate as possible while considering all accounting principles and the
ethics behind innovative financial statement decisions.

In the world of business, there are times when those in management positions arent as up-todate with accounting principles as a CPA would be, and yet they are the ones making decisions
that can negatively impact the financial reporting of a company. For this reason we have come
up with three ideas to help employers, coworkers, subordinates, and organizations be more aware
of proper financial reporting practices.

Education
First and foremost is knowledge. Educating all members of the team concerning the ethical
standards within the company will help get everyone on the same page. Accountants, like
others operating in the business world, are faced with many ethical dilemmas, some of which are
complex and difficult to resolve. For instance, the capital markets focus on periodic profits may
tempt a companys management to bend or even break accounting rules to inflate reported net
income. In these situations, technical competence is not enough to resolve the dilemma.13 Its

12
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Intermediate Accounting, McGraw-Hill/Irwin Publisher, pg. 28-29


Intermediate Accounting, McGraw-Hill/Irwin Publisher, pg. 18

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important for a company to hold ongoing training meetings to update and reinforce standards,
even bringing in qualified guest speakers to address any questions team members may have
concerning ideas they come up with to increase profits.

Understanding Professional Role of Ethical Behavior


Secondly, we feel its important to help coworkers understand that they dont just have a job, but
are part of a profession. One of the elements that many believe distinguishes a profession from
other occupations is the acceptance by its members of a responsibility for the interests of those it
serves. A high standard of ethical behavior is expected of those engaged in a profession. These
standards often are articulated in a code of ethics. For example, law and medicine are
professions that have their own codes of professional ethics. These codes provide guidance and
rules to members in the performance of their professional responsibilities.14 In the world of
business all team members, including employers, need to understand that while the bottom line is
important, theres more to being a professional than just making money.

Practice Makes Perfect


Finally, the best way to fully embrace and understand educational training is by putting it into
practice. Ethical codes are informative and helpful. However, the motivation to behave
ethically must come from within oneself and not just from the fear of penalties for violating
professional codes.15 Presented below is a sequence of steps taken from our Intermediate
Accounting textbook that provide a framework for analyzing ethical issues. These steps can help
in training exercises during staff meetings to learn how to apply a sense of right and wrong to
ethical dilemmas:
Step 1.

Determine the facts of the situation. This involves determining the who, what, where,
when, and how.

14
15

Intermediate Accounting, McGraw-Hill/Irwin Publisher, pg. 18


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Step 2.

Identify the ethical issue and the stakeholders. Stakeholders may include
shareholders, creditors, management, employees, and the community.

Step 3.

Identify the values related to the situation. For example, in some situations
confidentiality may be an important value that may conflict with the right to know.

Step 4.

Specify the alternative courses of action.

Step 5.

Evaluate the courses of action specified in step 4 in terms of their consistency with
the values identified in step 3. This step may or may not lead to a suggested course of
action.

Step 6.

Identify the consequences of each possible course of action. If step 5 does not
provide a course of action, assess the consequences of each possible course of action
for all of the stakeholders involved.

Step 7.

Make your decision and take any indicated action.16

In conclusion, we feel that the staff at First Mates Wholesale Boating Supply Company could
benefit from our suggestions when it comes to fully understanding their roles in decision making.
Great ideas can lead to disastrous results in financial reporting, even when there is no intension
of acting in an unethical manner. Its great to have goals, innovative ideas, and a willingness to
please the boss, but when it comes to implementing ideas without an understanding of the full
impact some ideas may have, thats just careless and could end up costing more than just unmet
shareholders expectations.

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Intermediate Accounting, McGraw-Hill/Irwin Publisher, pg. 18-19

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