Ethics And Governance – The Impact Of A Bonus Incentive Scheme On Financial Statements | Ledger Posting And Trial Balance | Ethical Standards Breaches

Question 1

Answer to Part A:

The stakeholders in this situation are, the manager of Vroom Ltd, Freda Chuse and the accountant herself, Lucia and all the acting and present shareholders of the company.

Answer to Part B:

Freda asked Lucia to find ways of deferring recognition of as much revenue as possible for the next financial year because Freda anticipated the fact that the total earned revenue for the financial year ending 30 June, 2016 being $3.5 million would definitely be a hindrance. This is because too much revenue if earned by the company then the government would refrain from paying Vroom Ltd the grant for training apprentice mechanics and the company would lose upon $100000 tax-free cash inflow (Zadek, Evans and Pruzan 2013). The other reason for Freda to ask Lucia to do this is, as stated in the question, Freda’s bonus will be maximized when the firm earns $3 million therefore she will not receive any kind of benefit for revenue earned of $3.5 million. However according to the estimations of Freda the next financial year will not observe such higher amounts of profit so it is in her best interests to forward the excess of $3 million to the next financial year. This will not only maximize her bonus earned but also help in maintaining the goodwill of the company by removing the negativities that a poor financial statement may have (Tweedie et al., 2013).

Answer to Part C:

The ethical issues that may arise in this situation is that Lucia due to the unjustified pressure from her manager succumbs to the pressure and commits the unethical task as demanded by her manager, Freda. Another reason for Lucia to commit such a task is that she does not want to risk her own opportunities for promotion by upsetting her manager. The right way to react to the situation would be that if Lucia would have ensured all assets and liabilities and other major components of an accounting statement are recorded in the financial statements of the correct accounting period (Tweedie et al., 2013). It becomes highly unreasonable and unethical, if Lucia in reality does realize other assets and liabilities and other components of business that do not present a true and fair view of the financial statements of that particular year that is it does not righteously reflect the organizational performance and the position in terms of finance in the current period. Not to mention there are a huge number of techniques which can be utilized by Lucia in order to manipulate the amount of revenue earned, for instance, change in the procedure of calculating depreciation or manipulation in the number of remaining utilizable life of assets. These activities of manipulation in techniques may be generally accepted by all the accounting standards and might even fall under legal provisions but the practice is not at all ethical. It also becomes unacceptable on the part of the manager that she puts excess pressure on Lucia to execute entries in the books of accounts against the wishes of Lucia as she recognizes the task to be unethical (Liu, Yao and Hu, 2012).

Answer to Part D:

Question 2

 Lucia can defer all kinds of revenues and accrue as many expenses as possible by adjusting journal entries but this may lead to distortion in the financial statements which may in turn lead to improper reflection of the liquidity or financial position and financial performance of the company. This is not only a legal offence but it also displays a wrong or misleading image to the investors and shareholders. Lucia, if under pressure agrees to defer revenue and accrue expenses to show the total revenue earned for a particular financial year as less then it must be done on a short scale because passing adjusting entries in order to cover up revenue if done on a large scale will lead to serious issues like presentation of misstatements. Lastly adjustments done on a short scale or a large scale is obviously an ethical issue and must not be done (Apostolou, Dull and Schleifer, 2013).

Cash at Bank Account

Accounts Receivables

Accounts Payable

1. Dienhoff, Capital

1. Dienhoff, Drawings

Trucking Services Revenue

Rent Expense

Advertising Expense

Fuel Expense

The above ledger accounts are done for Carrying Your Load. The expenses that are incurred for a particular financial year are debited and the respective incomes are credited(Ahmed 2016).

Answer to Part 1:

In this question it has been asked to cite three examples to demonstrate how breaches of ethical standards were seriously treated by the professional organization. Thus the example of Mr. Henry N Bernard has been taken into account. On the date of 8^th September, 2016 the Disciplinary Tribunal accused Mr. Henry of breach in the following fields. The articles under which Mr. Henry was charged to be guilty, was 39(a) (ii) of the constitution. Mr. Henry was accused of not completing a quality review within a specific interval that is within specified quality time frames. Mr. Henry was also accused of the breach of not implementing a risk management framework for his firm. Thus the penalties were imposed.

The next example is of Ms Tracey Redman-Slater who was found to breach under Article 39(a)(ii)A of the Constitution on the date of 9^th August, 2016. The breach committed by Ms Tracey was that she had failed to provide requested information to the professional code of conduct in reaction to a complaint lodged, within the span of ten days. She was also charged guilty of depreciative attitude towards CPA Australia which was conducted in no best interest of the institution.In clearer terms she had failed to keep her promise to complete a client’s work within a period of eighteen months, hence the penalties were imposed (Hansen, V.J. and White, 2012).   

The third example is of Harvey Goodman who was accused of breach on the date of 5^th April, 2016. The breach that Harvey Goodman was accused of was that he did fail to finish a check up on review of quality despite the fact of being selected on August 2013. He was also found guilty of depreciating or demeaning attitude towards CPA Australia which was in no best interest of the institution. After repeated warnings and a fixed up date for the review of quality on November 2014, Harvey Goodman failed to keep his promise, thus was charged guilty. He was also not able to provide a written explanation to the professional code of conduct body for the reasons of his failure. Thus the penalties were imposed (Hansen, V.J. and White, 2012).  

Answer to Part 2:

All the three examples cited in the above study fall under the sub section of 100.21 of the APES 110 standards because it is clearly mentioned in this section that if a member is unable to perform his or her responsibility then it falls under this section (Carey, Monroe and Shailer, 2014).

Answer to Part 3:

The penalties imposed and the fines levied on the individuals for the breach committed by them is perfectly fine and apt. The decision taken by the disciplinary tribunal is completely just and requires no other alterations or adjustments. Therefore in both the three cases the penalties imposed by the accounting bodies are sufficient and need not be changed.

Ahmed, R., 2016. Trial Balance Report. In Cloud Computing Using Oracle Application Express (pp. 171-181). Apress.

Apostolou, B., Dull, R.B. and Schleifer, L.L., 2013. A framework for the pedagogy of accounting ethics. Accounting Education, 22(1), pp.1-17.

Carey, P.J., Monroe, G.S. and Shailer, G., 2014. Review of Post?CLERP 9 Australian Auditor Independence Research. Australian Accounting Review, 24(4), pp.370-380.

Hansen, V.J. and White, R.A., 2012. An investigation of the impact of preparer penalty provisions on tax preparer aggressiveness. Journal of the American Taxation Association, 34(1), pp.137-165.

Liu, C., Yao, L.J. and Hu, N., 2012. Improving ethics education in accounting: Lessons from medicine and law. Issues in Accounting Education, 27(3), pp.671-690.

Tweedie, D., Dyball, M.C., Hazelton, J. and Wright, S., 2013. Teaching global ethical standards: a case and strategy for broadening the accounting ethics curriculum. Journal of Business ethics, 115(1), pp.1-15.

Zadek, S., Evans, R. and Pruzan, P., 2013. Building corporate accountability: Emerging practice in social and ethical accounting and auditing. Routledge.

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