Question

Case 6. Assume you were recently hired as a staff accountant for Advanced Energy Solutions, Inc. You report to Tina, the director of financial reporting, who in turn reports to the CFO. One of your first assignments is to prepare the adjusting entries for the end of the second quarter and to draft the income statement. Tina instructs you to let her know as soon as you have the estimated earnings for the quarter. She says she will need to review the adjusting entries and earnings cal- culation with the CFO. After reviewing your work with the CFo, Tina tells you to change the entry that you recorded for depreciation expense on the company's fleet of trucks from $234,000 to $194,000. At first, you thought that you must have made some mistake in calculating the amount of depreciation, so you recheck your calculations. Surprisingly, you come up with the same amount again. So, tactfully you ask Tina for an explanation for the change. She tells you that depreciation is only an estimate and that the CFO will change his mind about estimates based on earnings Requirements 1. What is the effect of the change in the amount of the depreciation expense on the company's second-quarter earnings? 2. What is the ethical dilemma you face? 3. What alternatives might you consider, and what are the potential consequences of each alternative? 4. What are some of the common excuses used to rationalize unethical behavior?

Answer 1

1. What is the effect of the change in the amount of depreciation expenses on the company’s second-quarter earnings?

The change in the amount of depreciation from $234,000 to $194,000 results in decrease in profits by $40,000. Hence it results in inflation of profits by that much amount. Hence the second quarter earnings are inflated by $40,000.

2. What is the ethical dilemma you face?

The depreciation amount as computed by us is $234,000 when the director instructs to change the same in order to manipulate the financials, which means the company is window dressing the financials in order to cheat the users of financial statements. When money of so many people would be at a stake it would be highly unethical to show them wrong picture that company is earning more. Later even during audit, we shall be held responsible for the wring depreciation figure.

3. What alternatives you may consider, and what are the potential consequences of each alternative

1. I may agree to change the amount of depreciation
   In long run if the manipulation is detected by auditors or any other external agency the onus of proof shall be even on me as I would be one of the party to manipulating financials
2. I may disagree to change the amount of depreciation

I may not agree to change in the amount of depreciation, the director and CFO may consider my work to be unproductive which may result in losing of my job.

3. Try convincing Manager of its potential effects of inflating profits

I may even try to highlight to the Manager and CFO the effect of change in the amount of depreciation, by explaining them that indirectly they are manipulating the profits and what are the legal consequences of the same

4. Report the matter to top management

I can even report the matter to the top management who may not be aware of the wrong doings of some of its employees

4. What are some of the common excuses used to rationalize unethical behavior?

1. The item is not important part of entire financials hence the amount can be adjusted
2. The entry shall be later reversed towards the end of the year/start of the next year
3. It is not a material amount
4. The senior can pressurize their juniors by fear of losing out on the job