Legality and Ethicality

1100 Words5 Pages
Legality and Ethicality in Financial Reporting In week3, we are looking into the case of Excello Telecommunications, and study their behavior base on the knowledge of legality and ethicality in financial reporting. Excello Telecommunications has been successful in the past. However, in recent years, the company is facing more and more competitors. For the first in the company’s history, the earnings estimate won’t be met. This means nervous investors and drop in value of Excello stocks. And the top management worries about the effect on bonus and stock options. Someone needs to find a solution to steer the situation around. This is when CFO Terry Reed notices a sale on December 20, 2010. Data Equipment Systems made a purchase of $1.2…show more content…
Ethicality of the Events Terry Reed wants to record $1.2 million of Data Equipment Systems’ sale before 2010 ends. The motivation of his intent is to meet the revenue estimate, and so to secure the top management’s bonus and stock option. Marty Fuller explains the rules in accounting for the sales where the goods are held for future delivery. But Reed is prepared to accelerate the revenue by all means. Fuller then called the accounting team for alternative solution to satisfied Reed’s requirement, and at the meantime, not to violate GAAP standards and legislations. Alternative Offered by the Accounting Team The accounting team of Excello Telecommunications come up with three alternatives: 1. Transfer the product to an off-site warehouse owned by the home company by December 31 and hold until January 11 for shipment. 2. Transfer the product to Data Equipment by December 31 and agree that the customer could return for a full refund after it arrives. 3. Offer the customer a 10% discount to take the product by December 31. The first alternative is unethical. Although the merchandise is off the site, but it still remain as Excello property. So the sale doesn’t occur, therefore the recording of sales is false. The second alternative is definitely illegal. For transferring the merchandise to the customer company then return it to Excello, the company need to disclose the return in the footnote along with the financial statement. When auditors compare
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