Question

ag Essay You are the assistant controller in charge of general ledger accounts at Riverdale Bottling Company. Your company has a large loan from an insurance company. The loan agreement requires that the company's cash balance be maintained at $200,000 or more, as reported monthly. At June 30 the cash balance is $80,000, which you report to Gina Schmitt, the financial vice president .Gina excitedly instructs you to keep the cash receipts book open for one additional day for purposes of the June 30 report to the insurance company. Gina says, " If we don't get that cash balance over $200,000 we'll default on our loan agreement. They could close us down, put us all out of our jobs! Gina continues. "I talked to Ononto Distributors (one of Riverdale's largest customers) this morning. They said they sent us a check for $150,000 yesterday. We should receive it tomorrow. If we include just That one check in our cash balance, we'll be in the clear. It is in the mail!" Instructions: Who will suffer negative effects if you do not comply with Gina Schmitt's instructions? Who will suffer if you do comply? a. b. What are the ethical considerations in this case? What alternatives do you have?

Answer 1

1. The loan agreements requires the Company Cash balance be maintained at $200,000 or more, as reported monthly. The Company's business will suffer the negative effect if we don't comply with Gina Schmitt's instructions. If we do comply this will tantamount to failure in internal control of the Company.

2. Practically, the cash balance register should have been closed at every month end. If we do not close the books there will be a lapse in the internal control of the Company. Fraudulent behavior can lead its detection even at the time of audit of books of account.

3. Sometimes, breach of one does not lead to violation of the agreement. Hence the lender can be satisfied that we are having more than $200,000 subsequent to the month end. Or we can account the check on the basis of mail and show it is in BRS (Bank Reconciliation Statement) which will obviously cleared on subsequent date. If the transaction was before month end and check date is also before month end then there should not be any concern.