Question

On January 20, 2017, Tamira Nelson, the accountant for Picton Enterprises, is feeling pressure to complete the annual financial statements. The company president has said he needs up-to-date financial statements to share with the bank on January 21 at a dinner meeting that has been called to discuss Picton’s obtaining loan financing for a special building project. Tamira knows that she will not be able to gather all the needed information in the next 24 hours to prepare the entire set of adjusting entries. Those entries must be posted before the financial statements accurately portray the company’s performance and financial position for the fiscal period ended December 31, 2016. Tamira ultimately decides to estimate several expense accruals at the last minute. When deciding on estimates for the expenses, she uses low estimates because she does not want to make the financial statements look worse than they are. Tamira finishes the financial statements before the deadline and gives them to the president without mentioning that several account balances are estimates that she provided.

1. Identify several courses of action that Tamira could have taken instead of the one she took.

2. If you were in Tamira’s situation, what would you have done? Briefly justify your response.

Answer 1

1) Tamira’s act of intentionally utilizing low estimates for providing the financial statement a better outlook under any circumstance is not advisable. The course of action she opted was wrong; Tamira should have been upfront with which items were estimated and why they were estimated. The items that she was unable to be estimate she should have put a notation that the items are still under review. While doing her estimations she should not have guess at any value or chosen to deliberately use low estimate values.

Tamaira should have consulted with the president and told him that finalization of the financial statements would not be ready within his requested timeline. She could explain that delay in preparation of financial statement is a normal event; and would have provided him an estimated date of when he could expect to receive the a draft internal copy. She should also have given an estimated date of the finalisation of financial statements so that it can be sent for publishing to external user.

2) If I had been in Tamira’s situation, I would not have intentionally inflate or deflate the figures to make financial statements give a better financial outlook. While presenting the draft and final year-end financial statements I would have told the numbers on which estimations were used and it's reason. Furthermore the financial statements users usually prefer knowing worst-case scenarios over best-case outcomes. Thus the estimation probably should have used less optimistic. The use of estimates gets the financial statements closer to their final statement instead of ignoring the adjustments completely. I would have inform the president also that the financial statements be are required to audited by an independent firm and thus would not be able to publish any financial statements to external user prior to the audit being complete and passing.