South City Electronics
1. The overarching authority to address the question of recognizing revenue within the current quarter, is addressed in the AICPA Code of Professional Conduct ET 1.130.010.01.a.. The code states that one should not knowingly misrepresent facts by making materially false and misleading entries. In terms of the case, South City Electronics looked to accelerate a bill-and-hold transaction with Victor Systems in order to avoid being in default of a $10 million loan. It is clear that this deal was knowingly done with the idea of avoiding default, but is it materially false.
In order to address this question, we must take a look at the lowest standard of ethics, the law. According to the Codification of Staff Accounting Bulletins, Topic 13. 3a, …show more content…
in general companies are not able to recognize revenue of bill-and-hold transactions. This is due to the fact that the performance obligation has yet to be performed and that the third party has yet to have the rights of ownership. However, there is a possible exception to this rule if they fall within under four criteria. The key here is whether SCE can justify its departure from this general rule according to section in AICPA. The first being that the risks must have passed to the buyer who in this case is Victor Systems. While not explicity stated from the facts, if we assume that this is F.O.B shipping point then the risks have indeed passed to the boyer, Next, the customer must make a financial commitment which it does as Victor has aggreed to complete the cash transaction by the end of the next business day. In addition, the goods must be on a fixed schedule for delivery which it is as they will arrive at MAY. Finally, the fourth criteria brings a grey area in the law. The buyer, not the seller must request that the transaction be done. While not as stated, it can easily be said that Victor Systems requested the transaction to be bill-and-hold due to two criteria. First, they were able to receive a discount of 10 present and in addition, they requested it to be delivered to the business that is right next to them.
This is not the end all be all list however. Even though that in this case, it can be said that they address all four criteria. A key piece to additional consideration is delivery is not considered unless to the place of business or another site specified by the customer. In this case, the delivery will be done with Kelly Systems a neighbor company to victor. A key element of this is that there needs to be a substantial payment before holding it at the site. In this case, the full payment will be received by the end of the accounting period and before Victor recives the goods at Kelly Electronics which also checks this box off too. From this, at the very least there is a argument that can be made for this to be recorded as revenue in the current quarter.
The question remains, is it materially misleading?
First we need to define materiality. In the most basic sense, materiality is the idea that there are times where transactions are so minuet, that they are not worth measuring with precision . For example, a misuse of funds of 10 cents will not have a large affect on a reasonable’;s investors decision. In general, an item is not material if it affects earnings between 5 to 10 percent (Textbook). From the facts of the case, it would be in the best assumption that this is indeed a martial issue. Originally, the company’s earnings are $160,000. In order to reach the debt convidents the company must gain at least an additional 240,000 in revenue. Considering that the rgonition of revenue from the agreement would allow SCE to meet the debt convident for the loan, then this is a material issues as it boost earning by an additional 60 percent, well above the 10 percent threshold. This means that this is an issue that the auditors will need to take a further look …show more content…
at.
In terms of misleading, we must first look at appropriate guidance to define misleading in the accounting context. As defined by Section 10-b5 , a misleading fact is when a reasonable investor exercising due care would look at a statement and make a false conclusion. In terms of the case, it can be argued that by recognizing revenue now would be misleading. When an investor would glance at the financial statements, they would feel that the company is in good financial health. They would be compoleltly unaware that the company was close to defaulting on a $10 million loan just a bit before.
There is no question whether or not this is a form of earnings management. Let earnings management be defined as when upper-management uses judgement in reporting that is intended to achieve a specific goal (Textbook). We will first take a look at the uttilitarisum perspective. This ethial method states that one should evaluate the risks and benefits then from there Under the rule-utilitarian view there is no room for earnings management in accounting as it breaks or at the very least bends ethical rules. Therefore, even if this is assumed to be non material in nature, SCE should still deffer the recognition of revenue because it will be misleading to investors to say that the company was in good financial health at the end of the quarter. Therefore, the consquences will outweigh tbe benefits due to the rule break,
Let’s take a look at the act-utilitiarism viewpoint. While this may be misleading, does the benefits outweigh the consequences if they were to defer revenue. To look at this viewpoint, we must first define some of the major stakeholders that would be effects by the situation. These include all of the follow, ALL LISTED. In terms of the stakeholders, they desire to have the highest stock price possible as they hope to gain a large return on their investment. Therefore, if SCE does default on the loan, then the stock price will drop. This will also hurt the likes of upper-management and the board of directors as jobs and incentives will be on the line. On the flip side, this will impact negativily the bank as that increases the risks that they may not actually get paid in full for the loan. In addition, this does have a chance of negativily impacting the shareholder as well if this was deemed to be illegal in fact. In this way, the default would cause more harm than good for the stakeholders, so they should continue with the decision to regonize the revenue in the current quarter.
Next, lets take a look at this dilemma from the perpective of egoism.
This states that the company or the company would act within their own best interests. In the short-term this would easily apply them to record the revenue in the current quarter so they do not get negatively affected by the failure of the debt convidents. However, this action can lead to a slippery slope for the company as a whole. Even though this action is not a sure fire unethical, one can certainly make the case for it to be so. Therefore, this may cause a snow ball effect where the company will start to push other accounting measures in the future in order to meet their debt covenants or the investors’ expectations themselves. In addition to this, if this is deemed unethical and word gets out then they have their reputation on the line as well as this would reflect badly on themselves. Even more so would they be reflected poorly if they continue aggressive accounting practice and then starts to fall in the grey area of accounting more often than not. If they were to go down this path, then they would potentially see a potential court case, a fine from the AICPA, and a possible loss of their CPA license from the State Board of Accountancy. Therefore, even if they are only thinking about themselves, they should very much consider differing the revenue for the long-term perspective of their
needs.
Finally, we will address this question based on the method of virtue ethics. This focuses less on rules and more so on the habits of character of individuals within an organization. In this way they shouldbe sure they act impartical in demonstrating their professional responsibilities. This can be looked at by the auditors response to the situation. It is clear that the best interests of the company are to not fail the debt convidents. However, the auditor must use professional judgement when making these decisions to ensure that the company maintain high virtues. If they determine that these are materially misleading, then they must be sure to withheld pressures from the company to regonize the revenue. The company must also take a virtue ethics when making this decision. When they look at their code of conduct on the wall, they should be able to check that this decision follows the code. Considering Levine states that this is a one-time thing does indicate that deep down he does feel that this is indeed unethical from that standpoint.
Even if it does not follow the law, the biggest concern of this decision is the snowball effect. While it is clear that there is a grey area when looking at this ethically, they may aggressive nature of this transaction would indicate that this can lead to something far more greater. In this way, I would consider this to be an unethical decisiol.
In order to address this question, we must take a look at the lowest standard of ethics, the law. According to the Codification of Staff Accounting Bulletins, Topic 13. 3a, …show more content…
in general companies are not able to recognize revenue of bill-and-hold transactions. This is due to the fact that the performance obligation has yet to be performed and that the third party has yet to have the rights of ownership. However, there is a possible exception to this rule if they fall within under four criteria. The key here is whether SCE can justify its departure from this general rule according to section in AICPA. The first being that the risks must have passed to the buyer who in this case is Victor Systems. While not explicity stated from the facts, if we assume that this is F.O.B shipping point then the risks have indeed passed to the boyer, Next, the customer must make a financial commitment which it does as Victor has aggreed to complete the cash transaction by the end of the next business day. In addition, the goods must be on a fixed schedule for delivery which it is as they will arrive at MAY. Finally, the fourth criteria brings a grey area in the law. The buyer, not the seller must request that the transaction be done. While not as stated, it can easily be said that Victor Systems requested the transaction to be bill-and-hold due to two criteria. First, they were able to receive a discount of 10 present and in addition, they requested it to be delivered to the business that is right next to them.
This is not the end all be all list however. Even though that in this case, it can be said that they address all four criteria. A key piece to additional consideration is delivery is not considered unless to the place of business or another site specified by the customer. In this case, the delivery will be done with Kelly Systems a neighbor company to victor. A key element of this is that there needs to be a substantial payment before holding it at the site. In this case, the full payment will be received by the end of the accounting period and before Victor recives the goods at Kelly Electronics which also checks this box off too. From this, at the very least there is a argument that can be made for this to be recorded as revenue in the current quarter.
The question remains, is it materially misleading?
First we need to define materiality. In the most basic sense, materiality is the idea that there are times where transactions are so minuet, that they are not worth measuring with precision . For example, a misuse of funds of 10 cents will not have a large affect on a reasonable’;s investors decision. In general, an item is not material if it affects earnings between 5 to 10 percent (Textbook). From the facts of the case, it would be in the best assumption that this is indeed a martial issue. Originally, the company’s earnings are $160,000. In order to reach the debt convidents the company must gain at least an additional 240,000 in revenue. Considering that the rgonition of revenue from the agreement would allow SCE to meet the debt convident for the loan, then this is a material issues as it boost earning by an additional 60 percent, well above the 10 percent threshold. This means that this is an issue that the auditors will need to take a further look …show more content…
at.
In terms of misleading, we must first look at appropriate guidance to define misleading in the accounting context. As defined by Section 10-b5 , a misleading fact is when a reasonable investor exercising due care would look at a statement and make a false conclusion. In terms of the case, it can be argued that by recognizing revenue now would be misleading. When an investor would glance at the financial statements, they would feel that the company is in good financial health. They would be compoleltly unaware that the company was close to defaulting on a $10 million loan just a bit before.
There is no question whether or not this is a form of earnings management. Let earnings management be defined as when upper-management uses judgement in reporting that is intended to achieve a specific goal (Textbook). We will first take a look at the uttilitarisum perspective. This ethial method states that one should evaluate the risks and benefits then from there Under the rule-utilitarian view there is no room for earnings management in accounting as it breaks or at the very least bends ethical rules. Therefore, even if this is assumed to be non material in nature, SCE should still deffer the recognition of revenue because it will be misleading to investors to say that the company was in good financial health at the end of the quarter. Therefore, the consquences will outweigh tbe benefits due to the rule break,
Let’s take a look at the act-utilitiarism viewpoint. While this may be misleading, does the benefits outweigh the consequences if they were to defer revenue. To look at this viewpoint, we must first define some of the major stakeholders that would be effects by the situation. These include all of the follow, ALL LISTED. In terms of the stakeholders, they desire to have the highest stock price possible as they hope to gain a large return on their investment. Therefore, if SCE does default on the loan, then the stock price will drop. This will also hurt the likes of upper-management and the board of directors as jobs and incentives will be on the line. On the flip side, this will impact negativily the bank as that increases the risks that they may not actually get paid in full for the loan. In addition, this does have a chance of negativily impacting the shareholder as well if this was deemed to be illegal in fact. In this way, the default would cause more harm than good for the stakeholders, so they should continue with the decision to regonize the revenue in the current quarter.
Next, lets take a look at this dilemma from the perpective of egoism.
This states that the company or the company would act within their own best interests. In the short-term this would easily apply them to record the revenue in the current quarter so they do not get negatively affected by the failure of the debt convidents. However, this action can lead to a slippery slope for the company as a whole. Even though this action is not a sure fire unethical, one can certainly make the case for it to be so. Therefore, this may cause a snow ball effect where the company will start to push other accounting measures in the future in order to meet their debt covenants or the investors’ expectations themselves. In addition to this, if this is deemed unethical and word gets out then they have their reputation on the line as well as this would reflect badly on themselves. Even more so would they be reflected poorly if they continue aggressive accounting practice and then starts to fall in the grey area of accounting more often than not. If they were to go down this path, then they would potentially see a potential court case, a fine from the AICPA, and a possible loss of their CPA license from the State Board of Accountancy. Therefore, even if they are only thinking about themselves, they should very much consider differing the revenue for the long-term perspective of their
needs.
Finally, we will address this question based on the method of virtue ethics. This focuses less on rules and more so on the habits of character of individuals within an organization. In this way they shouldbe sure they act impartical in demonstrating their professional responsibilities. This can be looked at by the auditors response to the situation. It is clear that the best interests of the company are to not fail the debt convidents. However, the auditor must use professional judgement when making these decisions to ensure that the company maintain high virtues. If they determine that these are materially misleading, then they must be sure to withheld pressures from the company to regonize the revenue. The company must also take a virtue ethics when making this decision. When they look at their code of conduct on the wall, they should be able to check that this decision follows the code. Considering Levine states that this is a one-time thing does indicate that deep down he does feel that this is indeed unethical from that standpoint.
Even if it does not follow the law, the biggest concern of this decision is the snowball effect. While it is clear that there is a grey area when looking at this ethically, they may aggressive nature of this transaction would indicate that this can lead to something far more greater. In this way, I would consider this to be an unethical decisiol.