Question

Jeff Brown is an accountant in a large retail chain. Jeff is in charge of preparing quarterly
financial statements and is currently working on the statements for the 3 month period
which ended on 30th June 2019.
During the month of May and June, the company spent RM2,000,000 on a TV
advertising campaign. All the costs were charged to advertising expense. The
company’s chief financial officer (CFO) has asked Jeff to prepare an adjusting entry to
remove the costs from advertising expense and create a prepaid advertising account
that will be expensed in July. The CFO explained “ This advertising campaign has
resulted in increased sales in May and June. I think it will continue to bring in customers
through the month of July. By recording the advertising costs as an asset, we can match
the costs with increased sales in July. Besides, if we expense the whole costs in May
and June, we will show an operating loss on our statement of profit and loss for the
quarter. The bank requires that we continue to show quarterly profits to maintain our
loan in good standing.”

Requirement:

1. From the scenario above, outline the ethical problem and suggest ways in which it
could be resolved or avoided.
2. What are some implications of unethical behavior by accountants for stakeholders
using financial reports?
3. Discuss the role of the accounting profession in the issue of ethics?

Answer 1

1 The ethical problem is the point that the advertisement expense is being carried to a period which is beyond the time for which the expense is made.

Suggestions:

• Accountant must be very clear as to the expenses made for the duration of its revenue( the matching revenues) prior to the actual transaction.
• The expense if done in particular month, must be made in same month irrespective of profit or loss

2 Implications

• the income statement of MAY and JUNE will be misleading to the investors if advertisement expense is carried to july also.
• By adding prepaid expense, an false asset is shown in books.

3 accounting role

• accounting profession is directly related to the decisions of investors.
• the tax and other authorities may find misleading facts if accountant do unprofessional practice
• Accountant Must follow the accounting principles vigorously in order to comply the legal requirement and create the atmosphere of trust.