Question

Question 3

(10 marks)

West Coast Ltd.’s board of directors held a board meeting to discuss the 2017 financial results. Later on, the board would release the financial statements to its shareholders. One particular topic that they discussed is detailed below.

Company president, Tony Edwards, stated that 2017 was not a successful year financially. With expenses exceeding revenues, West Coast Ltd. would have to report a large loss in 2017, adding to the company’s last 5 years of losses reported. Since another year of losses would not satisfy the company’s shareholders, Tony Edwards suggestion that, for a limited time only, he personally could transfer shares, which he bought in 2012 for $ 1 million and are now worth $ 10 million, to West Coast Ltd. to increase the value of West Coast Ltd.’s balance sheet. The president then added that the chief financial officer, Tina Brown, could eliminate $ 1 million in expenses. Then, West Coast Ltd. could go to the bank for refinancing.

Tina Brown disagreed with the president’s recommendations, stating that generally accepted accounting principles would not allow it.

Required:

1. What is the basic ethical issue in the above discussion?
2. How do the president’s recommendations violate generally accepted accounting principles?

Answer 1

A. The basic ethical issue is that company should present it's true & fair value Financial statement. Removing the losses and showing the assets which was not owned by company is totally a false and mis-guiding financial. This will give the wrong picture of the company to shareholder and investor.

B. As per the generally accepted principal company should present correct and fair financial statement. By reducing the expenses which was already happened and adding the assets which was not owned by company will give the in-correct picture of financial statement. So it will be totally violation of generally accepted accounting principles.