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Practical Application: Ethical Scenarios in Accounting

Instructor: Scott Tuning

Scott has been a faculty member in higher education for over 10 years. He holds an MBA in Management, an MA in counseling, and an M.Div. in Academic Biblical Studies.

Accounting is a very technical, and sometimes complex, skill to master. Accounting professionals must uphold the highest ethical standards at all times so that trust in an organization remains high.

Accounting Ethics

Ethical behavior is important in all situations, but ethical accounting practices are an absolute necessity. This is due to the fact that knowingly making inaccurate representations of an organization's financial position often constitutes felony fraud, and it is always unfair to investors, employees, and other stakeholders. After you review the information in the lesson The Importance of Ethics in Accounting, read the short scenarios below and answer some questions about each.

Scenario 1: Whose Money is It Anyway?

Rosalie works as the controller in a moderate-sized non-profit organization dedicated to enhancing access to clean water and food in developing countries. The organization she works for is fairly well-known because of the organization's fundraising strategy. Specifically, Rosalie's company buys numerous long TV spots that air during the overnight hours. Using images from some of the organization's most important projects, viewers are shown just how much their donations could help people of these impoverished, often war-torn regions.

A recent change at the executive level has placed her in an increasingly unenviable position. The new CEO is not quite ''by the book'' in terms of his expense account. Walking in to the office one day, Rosalie is surprised to see a truly magnificent salt-water fish tank, a new addition to the lobby. The tank is several hundred gallons in size, and holds several thousand dollars worth of exotic fish. When she asks a colleague where it came from, her co-worker tells her the CEO purchased it. ''I guess everybody has their hobby.'' Rosalie mutters under her breath.

Her mild annoyance at the expensive hobby turns decidedly darker a few weeks later when the CEO's purchasing card has charges totaling nearly $3,000 for what he labeled ''miscellaneous facilities expenses.'' As Rosalie suspects, most of that money was ''invested'' in the fish tank. Later that night as Rosalie watches TV, one of her organization's 2-minute TV spots rolls. The spot claws at the heart as it depicts people whose lives have been destroyed by poverty and violence. When the spot ends with the usual appeal for a''gift'' of $30 a month, Rosalie feels ill. ''I doubt anyone picking up the phone right now is aware that part of their donation is funding a massive fish tank!''

Analysis

  • Was spending the non-profit's money on a fish tank illegal, unethical (but legal), or not a problem at all? Explain.
  • As the organization's controller, what are Rosalie's legal, ethical, and professional responsibilities?
  • What, if anything, should Rosalie do right now if she wants to demonstrate the highest regard for professional ethics?

Potential Outcomes / Conclusions

Buying a fish tank with funds raised for an expressly different purpose is both illegal and unethical. Most importantly, Rosalie must not approve the expenditure. An indication of approval places Rosalie in a state of tremendous legal and professional exposure. At the moment, Rosalie should inform her CFO.

Scenario 2: XYZ Global Cube Solutions International, LLC

Cecelia is one of three principals at a financial services firm that performs corporate audits. Recently, while auditing a large organization called Acme-Mega, some of Cecelia's auditors alerted her to irregularities they uncovered. Specifically, Acme-Mega's books showed a very large accounts receivable balance from a company labeled Global Cube Solutions International, LLC. Despite these anomalies, Global Cube Solutions International, LLC appeared to owe tens of millions of dollars to Acme-Mega. What this money is owed for, however, is entirely unclear.

Acting on a hunch, Cecelia re-runs Acme-Mega's earnings, this time subtracting the monies owed by Global Cube Solutions International, LLC. Her hunch is confirmed. Global Cube Solutions International, LLC doesn't really owe Acme-Mega anything.

Rather, Global Cube's fictitious debt has allowed Acme-Mega's accountants to claim the money as a receivable - thereby classifying it as an asset rather than a liability. This has been ongoing for quite some time, and it has had the effect of making it appear that Acme-Mega is turning a healthy profit when, in fact, they are approaching bankruptcy.

Analysis

  • Was the creation of the fictitious debt illegal, unethical, or both?
  • What is Cecelia's ethical (and perhaps legal) responsibility in this scenario?
  • Who at Acme-Mega is most likely accountable for this irregularity?

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