Question

Ethics in Accounting You are the accountant for a medium-size manufacturer. Your company has some existing debt that requires the company to maintain a current ratio of 1.50 or higher. If the ratio drops below that value, the lender can increase the interest rate from 6% to 9%. Recently, the company's current ratio has been hovering around 1.50, and the president believes that when some long- term debt maturing in the following year is reported as current, the ratio will fall below 1.50. The president asks you to keep the long-term debt as a long-term liability instead of reclassifying it as a current liability. “After all, “he says, “it is still reported as a liability." Required Is there an ethical issue with the president's request? How should you respond?

Answer 1

Yes, there is an ethical issue involved as the President is asking the accountant to misrepresent the financial statements of the Company by defying accounting concepts and principles.

The President should be made aware of the relevant accounting rule that all the liabilities maturing in coming one year are classified as 'Current liabilities' and the President should be informed that misrepresenting financial facts tantamounts to window dressing the accounts and conducting fraud, which may have serious implications for the Company and also for their own profession.

Even if the President does not agree, the accountant should not give in to his request to falsify financial information, and if possible, whistleblow in extreme situation.