Question

Question 2 [20 marks] Billy Jean is a manager of a major insurance regional company. As regional manager his compensation package comprises of a base salary, commissions and a bonus when the region sells policies in excess of its quota. Billy Jean has been under enormous financial pressure 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 dropped below the normal quota for the first time in years You have been working for Billy Jean for two years and like everyone you are happy to work under such a supportive boss You are very sympathetic to his personal circumstances. 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 managers bonus. While you are working late at year end, Billy Jean stops by your office She asks you to change the manner in which you have accounted for a new property insurance policy for a large local business. A substantial cheque came in the mail on December 31 the last day of the reporting year. The period covers the period beginning on January 5. You deposited the cheque correctly, debited the cash account and credited unearned revenue account Billy Jean says: "Hey we have the money this year why don't we count the revenue this year? I never understood why you accountants are so picky about these things anyway. I want to change the way you have recorded the transaction, want you to credit the revenue account. Another thing is that I have done favors for you in the past and I am asking for a small thing in return." With that he left for the day Required: 1. How should you handle the situation? 2. What are the ethical implications of Billy Jean's request? (5) 3. Who are the parties that would be helped or harmed if you complied with the request? (5) 4. If you fail to comply with the request, how will you explain your position to him in the morning? (5)

Answer 1

1) Since the policy sold covers the period beginning from the next year i.e. 5th of the next year, It would be improper rather illegal to account for same as revenue. Since the risk covered by the policy starts from 5th of the next year. If I as an accountant recognise the income it would be violation of matching principle of accounting. Hence, I would deny the request of Billy Jean and keep the entries that I have already posted as it is.

2) Ethical Implications:

The request made by Billy Jeans is completely unethical. This request suggests that only to comply with policy sales targets Billy Jeans has made this request. Further, this request may bring into question the organisation as a whole in two ways, its performance will improve unnecessarily which is not actual position. Further, recognising this income will also mean insurance company accepts the risk of claims from the date of recognition of Income.

3) Parties who will be helped or harmed:

This practice will surely help Billy Jeans as her targets for bonus will be achieved by this mischievous practice. This practice may help customers opting for insurance cover as the risk will get covered from earlier date than intended.

This practice will harm the Insurance company for sure as its results will be distorted and it will be assuming the risk from an earlier date than intended. This practice can harm me as an accountant, as and when the wrong practice comes to notice first question will be asked to accountant who adopted this malpractice. This may cost me my job as an accountant.

4) I will surely fail to comply the request, in the next morning I will make it very clear that resorting to such practice can cost me my job and furthermore the request made is unethical and also illegal. This request if complied may improve short term picture but in the long term this is harmful for the organisation as a whole. Hence, I could not comply the request made by you yesterday.