The given case study focuses on a scenario where a controller of a small clothing manufacturing business discovers an error in the physical counts of ending inventories. This could potentially impact the financial statements and consequently affect the profit sharing plans of the company’s key management employees (Voss, 2018). To understand what steps should be taken further, it is important to consider the ethical principles that guide the actions of accounting professionals in the business world.
Ethics in the Accounting Field
Ethics refers to the moral principles and values that individuals and organizations use to guide their behavior and decision-making processes. In accounting, ethics plays a critical role in ensuring that financial information is accurate, reliable, and transparent (Spiceland, 2019). Professionalism in accounting requires adherence to ethical standards, which include integrity, objectivity, confidentiality, and professional competence. A violation of ethics in accounting can have severe consequences for the business and society. In this case, the discovered error in the physical counts of inventories could lead to misstated financial statements, which could affect the decisions of investors, creditors, and other stakeholders. Such a violation of fiduciary duty could result in legal and financial penalties for the business and its employees, as well as their damaged reputation.
Guidelines and Legislation
In the given scenario, the controller is required to ensure compliance with US Generally Accepted Accounting Principles (GAAP) and the Code of Professional Conduct of the American Institute of Certified Public Accountants (AICPA). Under US GAAP, I would be required to make a correction to the financial statements to reflect the correct ending inventory balance of $4.6 million. The financial statements must be restated to reflect the corrected figures and disclosures made regarding the error (Mintz, 2020). The AICPA Code of Professional Conduct would require me to maintain objectivity, integrity, and professional competence in their work (Voss, 2018). I would therefore need to inform the company’s management and the auditors about the error and ensure that the financial statements are corrected and restated accordingly.
Failure to follow the guidance in the Codes could result in severe professional, business, personal, and societal impacts. Professionally, I may face disciplinary action by regulatory bodies, which could result in the loss of my license to practice accounting. From a business perspective, the company may face financial and reputational damages, including lawsuits, regulatory investigations, and loss of investor confidence (Mintz, 2020). The key management employees may also lose their trust in the company’s management, leading to poor employee morale and retention. My actions may also have broader societal impacts by eroding public trust in the accounting profession and financial reporting, leading to negative impacts on the economy and society as a whole.
Ethical Model for Decision Making
- The controller of DownHome Outerwear, Inc. discovered on January 20, 2022, that the physical counts for ending inventories on December 31, 2021, were incorrect. The counts should have been $4.6 million instead of the reported $5.3 million.
- The ethical issues in this situation include accuracy and integrity in financial reporting, compliance with US GAAP and the AICPA Code of Professional Conduct, and transparency and accountability to stakeholders (Voss, 2018). The stakeholders in this situation include the major investors, key management employees, auditors, regulatory bodies, state board of accountancy, and the broader community impacted by the company’s financial reporting.
- The values related to this situation include honesty, accuracy, integrity, transparency, accountability, compliance, and ethical conduct in financial reporting, as well as the rights and interests of stakeholders, such as investors, employees, and regulatory bodies (Spiceland, 2019). Additionally, fairness, responsibility, and good governance are also important values in this context.
- There are several alternative courses of action for the controller of DownHome Outerwear, Inc. These include restating financial statements to reflect the corrected inventory balance, ignoring the error, seeking professional advice, reporting the error to regulatory bodies, or resigning from their position.
- The value of honesty and integrity in financial reporting requires that the controller address the inventory error and ensure that the financial statements are accurate, transparent, and in compliance with GAAP and ethical standards (Mintz, 2020). Reporting the error to regulatory bodies, such as the state board of accountancy or SEC, would be consistent with these values and would demonstrate a commitment to accountability and good governance. Seeking professional advice and restating the financial statements are also consistent with these values, as they would help ensure that stakeholders receive accurate information about the company’s financial performance. Ignoring the error, however, would be inconsistent with these values and could lead to serious legal and reputational consequences.
- Restating financial statements could result in increased costs, potential legal and reputational risks, and the possibility of lower bonuses for the controller and key management employees. Ignoring the error could lead to inaccurate financial reporting and non-compliance with GAAP and ethical standards, resulting in potential legal and reputational damages for the company and potential disciplinary action against the controller. Seeking professional advice could result in increased costs and potential delays but could help ensure that the most appropriate course of action is taken to address the error and comply with GAAP and ethical standards. Reporting the error to regulatory bodies could lead to regulatory investigations and potential penalties for the company, but would demonstrate a commitment to transparency and accountability and help ensure compliance with GAAP and ethical standards. Resigning from the position could result in potential career and financial costs but could demonstrate a commitment to ethical conduct and accountability.
- The course of action I find most appropriate and would take is reporting the error, because it demonstrates a commitment to transparency and accountability and helps ensure compliance with GAAP and ethical standards.
References
Mintz, S. M. (2020). Ethical obligations and decision making in accounting: Text and cases. McGraw Hill.
Spiceland, J. D., Nelson, M. W., & Thomas, W. (2019). Intermediate accounting. Ingram.
Voss, G. (2018). Professional ethics in accounting as assessed by managers of entities. European Journal of Economics and Business Studies, 4(1), 167-175. Web.