The CEO of the business would like to improve the company’s bottom line by decreasing its expenses

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The CEO of the business would like to improve the company’s bottom line by decreasing its expenses for this quarter. In a memo, the CEO suggests capitalizing of the larger repair cost and recognizing it over several months.

Discuss if there is anything wrong or unethical about the CEO’s suggestion. Explain your response as well as how you would address it or what actions you would take.

In your responses to your classmates, discuss any alternatives that could be taken. What resources are available to professional accountants to navigate this situation?

In your own words, please post a response to the Discussion Board, and comment on other postings. You will be graded on the quality of your postings.

Sample Solution

There are significant ethical and accounting concerns with the CEO’s suggestion to capitalize the large repair cost and spread it out over several months. Here’s why:

  • Misrepresentation of Financial Performance: Capitalizing a repair cost creates an inaccurate picture of the company’s financial health in the current quarter. It lowers expenses now but inflates future periods, potentially misleading investors and creditors.
  • Violation of Generally Accepted Accounting Principles (GAAP): GAAP guidelines typically require repairs to be expensed in the period they occur, ensuring accurate financial reporting.

Addressing the Situation:

As a concerned professional, I would take the following actions:

  1. Hold a Private Meeting: Discuss the issue directly with the CEO in a private setting. Explain the accounting principles and potential consequences of capitalizing the repair cost.
  2. Present Alternatives: Suggest alternative solutions to improve the bottom line that are ethical and compliant with GAAP. These could include:
    • Exploring cost-cutting measures in other areas.
    • Negotiating with suppliers for better pricing.
    • Seeking additional funding through loans or investments (if appropriate).
  3. Seek External Guidance: If the CEO remains unconvinced, consider involving the company’s board of directors or external auditors for further guidance and potential intervention.

Alternatives for Improving the Bottom Line:

  • Reviewing Operating Expenses: Analyze non-essential expenses and identify areas for reduction.
  • Inventory Management: Optimize inventory levels to minimize storage costs and potential waste.
  • Negotiating with Vendors: Renegotiate contracts with suppliers for better pricing on materials or services.
  • Improving Efficiency: Streamline processes and procedures to enhance operational efficiency and potentially reduce labor costs.

Resources for Professional Accountants:

  • The American Institute of Certified Public Accountants (AICPA): Provides guidance and resources on GAAP and ethical conduct for accountants (URL aicpa & cima ethical standards ON American Institute of CPAs aicpa.org).
  • The Financial Accounting Standards Board (FASB): Sets accounting standards in the United States (URL fasb org).
  • Company’s Code of Ethics: Refer to the company’s established code of ethics for guidance on ethical decision-making.

By following these steps and utilizing available resources, we can ensure ethical and transparent financial reporting practices.

 

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