Essay Sample on Unethical Accounting Practices: Deferring Revenue and Accruing Expenses for Personal Gain

Why would the accountant want to defer revenue and accrue expenses? Please explain your responses.

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The intention of the accountant, Ray Green, to defer this year’s revenue and accrue this year’s expense is to increase next year’s reported profit. Green is aware that a budget that would reflect product line changes might deny him a bonus in the following year. Deferring this year’s income to next year will increase the sales and enable him to exceed the budgeted profit. He knows that the company will base his bonus on the performance of the budgeted profit achievement. Therefore, he is engaging in professional misconduct by going against the generally accepted accounting principles for his selfish interests.

Does this follow GAAP? (Hint: What are the rules for revenue recognition and the expense of financial reporting?)

One of the principles of Generally Accepted Accounting Principles (GAAP) is revenue recognition, which demands that when a company earns revenue, it should be relying on the accrual basis of accounting (Tuovila, 2020). If the firm uses cash basis accounting, then revenue is recognized when the services or products sold are paid. GAAP’s matching principle states that firms should report expenses in the year the related income was earned (Tuovila, 2020). The actions of Ray Green are against revenue recognition and the matching principles of GAAP. The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have developed a uniform set of principles that guide companies on revenue recognition (Tuovila, 2020).

If not, is it still legal? Why or why not?

This action by Ray is illegal. Recognizing the current year’s revenue in the following year would lead to understating the current year’s revenue and overstating next year’s revenue. It will also lead to overstating the company’s current liabilities. If Green goes ahead with his intentions, he will likely interfere with the company’s revenue recognition cycle. Ray’s actions are illegal as they are against the matching principles of recognition of revenue and reporting of expenses. Expenses are to be reported with the related revenue. Deferring next year’s expenses will therefore be illegal. Deferring this year’s revenue to the following year will leave the current year’s expense with unsupported revenue.

Is this action ethical?

The Institute of Management Accountants (IMA) code of ethics mandates accountants to conduct themselves in the most professional highest levels (Lanen et al., 2013). Accountants should be objective and people of high integrity. Ethics decision trees enable people to make moral decisions when faced with ethical dilemmas by finding alternatives (Martinov-Bennie & Mladenovic, 2015). Ray could determine the underperforming product lines and report to the management to make strategic plans to improve the sector. Other professional accounting bodies that have formulated members’ code of ethics are the Institute of Internal Auditors (IIA) and the American Institute of Certified Public Accountants (AICPA) (Lanen et al., 2013).

References

Lanen, W., Anderson, S., & Maher, M. (2013). Fundamentals of cost accounting. McGraw-Hill Education.

Martinov-Bennie, N., & Mladenovic, R. (2015). Investigation of the impact of an ethical framework and an integrated ethics education on accounting students’ ethical sensitivity and judgment. Journal of Business Ethics, 127(1), 189-203. https://doi.org/10.1007/s10551-013-2007-5

Tuovila, A. (2020). Revenue recognition definition. Investopedia https://www.investopedia.com/terms/r/revenuerecognition.asp