Question

Mike Lynch is the manager of an upstate New York regional office for an insurance company. As the regional manager, his compensation package comprises a base salary, commissions, and a bonus when the region sells new policies in excess of its quota. Mike has been under enormous pressure lately, stemming largely from two factors. First, he is experiencing a mounting personal debt due to a family member's illness. Second, compounding his worries, the region's sales of new policies have dipped below the normal quota for the first time in years.

You have been working for Mike for two years, and like everyone else in the office, you consider yourself lucky to work for such a supportive boss. You also feel great sympathy for his personal problems over the last few months. In your position as accountant for the regional office, you are only too aware of the drop in new policy sales and the impact this will have on the manager's bonus.

While you are working late at year-end, Mike stops by your office. Mike asks you to change the manner in which you have accounted for a new property insurance policy for a large local business. A substantial check for the premium came in the mail on December 31, the last day of the reporting year. The premium covers a period beginning on January 6. You deposited the check and correctly debited Cash and credited an unearned revenue account. Mike says, "Hey, we have the money this year, so why not count the revenue this year? I never did understand why you accountants are so picky about these things anyway. I'd like you to change the way you have recorded the transaction. I want you to credit a revenue account. And anyway, I've done favors for you in the past, and I am asking for such a small thing in return." With that, he leaves for the day (Libby, Libby, & Short, 2014).

For the previous scenario, you will create a written document that accomplishes the following:

1. Identify the ethical issue within the scenario.

2. Answer each of the following questions:

• Who will potentially be harmed?
• Who will potentially benefit?
• What (if any) rights or claims will be violated?

3. Discuss your responsibility and obligations as an accounting professional.

Answer 1

According to the given situation, I am an Accounting professional working for an insurance company and Mike Lynch is the manager, my boss. The company has received a check against a premium for a policy the beginning of which is from 6^th January next year. I have recorded the receipt as an unearned revenue in the books of Accounts. My boss, however, is of the opinion that the receipt of premium can be recorded as a revenue.

Accounting is based on accrual system (or mercantile basis). It implies that the revenues and expenses are recorded in Books of Accounts as and when they are earned or incurred and not based on receipt or expenditure. Irrespective of cash flow, the income is recognised when it is earned. The expense is recorded when it is incurred. If I have received cash for which the service is yet to be rendered, I will recognise a liability as unearned revenue and recognise that revenue when the service is rendered. Similarly, if I pay for an expense before receiving the service, I will record an asset of Prepaid expense and expense it out when I receive the service.

In the given situation, I am faced with the challenge of choosing between following the Accounting principles or listening to the boss. If I follow the Accounting principles, I will be fulfilling my professional duties by being compliant with Accounting principles. I am genuinely concerned about my boss’s personal situations, but I should not be unethical in following my professional responsibilities. The ethical issue is to decide whether to follow the boss or discharge professional duties.

If I follow the boss and recognise revenue in the current year, it would lead to misstatements in financial statements due to inflating the revenue. Misstatements in financial statements will have legal repercussions. The boss would get a bonus or commission on sales. Though it results in immediate financial gain to the boss, it may lead to fines and penalties in the long run for misrepresentation of revenue. If I follow the Accounting principles, the fines and penalties need not be incurred. The bonus or commission on sales as a part of boss’s salary can be received next year.

As an Accounting professional, I should be complying with the Accounting principles in maintaining the books of Accounts. I should explain to the boss why the premium received should be recorded as revenue in the next year and not in the current year. I should convince him about the possible amount of fines and the need to comply with the Accounting principles.