Sally is under pressure to complete the financial statements for HighTech Inc as they are required for publication o the following day. The results of the year are critical for the firm as it expects to report a profit following a five year period of product development and losses. The figures for preparing the financial statements are not logical where the company has overstated its assets and income by $300 million. Investigations show that the CEO and CFO signed and approved documents that caused the difference. The customer valuation of future sales have been realized and recorded in the current year. The revenue for each social media customer is expected to be $7 in the future years from the current $5 per year. The increased revenue that led to the additional $300 and accrual long-term account receivable of the same amount was booked on 30 th December. The IPO is scheduled for next year and the financial statements will affect its outcome. The financial advice for the IPO will be given by Morgan Stanley and the benefits of the offer to the shareholders run into millions.
From the case, Sally has to choose the best options for the stakeholders. She should be guided by ethics in determining the best course of action that improves the stakeholders’ interest. Is she decides to report the financial statements as they are, it can affect the reputation of the company if it is realized that the statements do not represent a true and fair view of the company. Similarly, her reputation will be affected and the past successes will also be negatively affected. Personal pressure also influences her decision as she is the sole provider of the family and has no saving. Sally should consult the CEO and CFO and inform them of the repercussions of reporting the inflated figures. She should bring to the attention of the two that reporting the figures as they do not only violate the ethical code of conduct but also the professional code and corporate governance. Sally should, therefore, be guided by professional judgment while preparing the financial statements. She should uphold values of objectivity, integrity, professional competence and behavior, due care and confidentially.
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The duty of professional responsibility as a CPA as well as a member of the AICPA is to maintain high standards and to help organizations to act ethically. They must ensure the quality of financial reporting by being on the frontline of safeguarding the integrity of financial statements. They must defend the quality of the financial reporting in the company. They are responsible for the overall stability as well as the progress of the society. Accounting professionals are instrumental in the formulation of business strategy, cost reduction, provide advice and help organizations to improve their top line in addition to mitigating risks. Accountants also provide assurance to the management that risk management internal control processes and governance are operating effectively in addition to offering advice on areas of advancement. Professional accountants also provide protection to the public interest by preparing financial data that is reliable and accurate to enhance public value and trust. Accountants need to exercise professional judgment if they are faced with competing demands (Jui, 2013).
The AICPA establishes ethical rules and regulations that members must follow. All CPAs are subject to the ethical requirements. The code of professional conduct identifies key principles of professional ethics which include; responsibility, public interest, integrity, objectivity and independence and due care. Accountants who follow the code of professional conduct and the law will be able to develop and uphold ethical behavior in their profession. They can try to steer an ethical tone from the top leadership of the company.
Sally has a responsibility to herself to provide the highest level of integrity, honesty, transparency and trustworthy. Integrity is a prerequisite if accountants are to guarantee public confidence. Members are called upon, to be honest, and candid in all respects even within the constraints of confidentiality. Personal gain or advantage must not override service and public trust. All principles must be upheld and an honest difference in opinion can be accepted. Accountants must, therefore, determine what is right or just. They must test their decisions by questioning whether they are doing what an individual of integrity is supposed to do. Similarly, they should establish whether they have retained their integrity. Sally, in this case, should observe the form and spirit of ethical standards and technical abilities. Circumventing the standards amounts to the subordination of judgment. She should also observe the principles of objectivity, due care and independence (AICPA, 2012).
Honesty
Honesty plays a significant role in the preparation of financial statement as it enhances the confidence of the investors. Similarly, it informs the management of important decisions and the financial statements can be used to run the company without fear of inappropriate reporting. Accounting professionals must demonstrate honesty while preparing the financial statements of the company to enable the management to make appropriate decisions. Sally should ensure that she follows the rules and regulations that guide accounting. She should adhere to the generally accepted accounting principles in gathering, tracking and reporting the financial information of the company. The financial statements must be reliable, relevant and understandable to the interested parties. The reported information must be accurate and true. Honesty will ensure that Sally maintains her reputation which will enable her to keep the job and avoid any unwanted outcome that could arise if the public becomes aware that the financial statement reported inflated revenues and assets.
Transparency
Companies are required to make accurate, full and timely disclosure of their financial performance which includes profits, losses, and expenditures. Financial statements must be prepared in a format and language that can easily be understood. Such information must be accurate to allow the investors make appropriate decisions. The accountant should offer concise, clear and a balanced view of the financial situation of the company. Numerous scandals that have taken place in several companies have raised the call for transparency. Company records with a complete and clear picture of their financial position reduce the uncertainty that is likely to arise from the market. Transparency is an essential element of financial reporting which increases the awareness, comprehensibility, and coherence of the information shared with the shareholders and potential investors (Schnackenberg & Tomlinson, 2016). Sally should ensure that the financial statements are prepared in a way that they show the performance of the company in the current year and do not deceive the potential investors. Transparency is a critical element to the company in its efforts to access external financing and in reducing the cost of capital as the information risk reduces due to the presence of reliable information.
Trustworthy
According to Schnackenberg & Tomlinson (2016), the perception of trustworthiness is determined by transparency. The company must be seen as having the ability, benevolent and integrity to conduct its operations in an ethical way. The information presented by the financial statements must be relied upon as truthful or honest. The investors will, therefore, be deceived of Sally prepares the financial statements using the inflated figures in order to report impressive performance. She should not be an accomplice of the CEO and CFO. Supporting the actions of the two implies that she will not only be breaking the law but also the code of professional ethics and putting the company in a situation where it cannot be trusted.
According to Brooks & Dunn (2012), accountants owe their loyalty to public interest and their financial interest, the interest of the management or even the current shareholders. Past scandals eroded the credibility of the accounting profession and there were calls to structure and harmonize and revise the codes of conduct to rededicate accounting to its fiduciary roots. Accountants are the arbiters of accountability in organizations and aid in decision making. The changing business environment has changed the focus from shareholders to stakeholders and accountants must understand these changes and how it affects their functions. The inability to understand the changing environment can result in an inappropriate decision, legal as well as non-legal consequences due to unethical issues.
Sally has a responsibility to the firm to ensure that the financial statements reflect a true and fair view of the company. It is her duty to ensure that the books of account are prepared according to the generally accepted accounting principles. She is guided by the principles and the code of ethics in performing her duties. If Sally realizes that her responsibility to the company is in conflict with the directions of the president, she should seek advice from a professional body. Similarly, she should use her professional judgment to prepare the financial statement. She is therefore not obliged to follow the directions of the president if they violate the code of conduct and GAAP. She should voice her concern to the president and raise her concern that the directive by the president is not in line with the provisions of the code of conduct and accounting principles. She should discuss the potential outcomes if the public is aware of the current practices of the company. Similarly, she should advise on how changes in the revenues and assets should be recognized in the financial statement. Doing so will ensure that the financial statements are prepared in the interest of all stakeholders if the company and reflect a true and fair view of the company. It will, therefore, help in developing appropriate strategies that will enhance the revenues and financial position of the company. Sally, therefore, must not prepare the financial statements according to the directions of the president but such statement must be prepared in accordance to the applicable principles and the code of conduct guiding the accounting profession (Brooks & Dunn, 2012).
Sally should follow the existing regulations, the generally accepted accounting principles and professional code of conduct and the code of ethics as provided by the International Ethics Standards Board of Accountants. A successful accountant and organization are served by accountability and governance that focuses on the fiduciary relationship. The management should focus on the interest of the stakeholders as they establish goals as well as processes to achieve the desired goals. The public expects to receive trustworthy reports relating to the company and this can only be achieved if the accountant focuses on the interest of the public. Focusing on personal goals or interest of the management leads to the erosion of the credibility of the company including the reputation of the accountant. CPA should be guided by values of independence, objective judgment and reporting and integrity. The IASB and IFAC standards call upon the accountant to focus on the interest of the public (Brooks & Dunn, 2012).
According to IESBA (2011) accounting professionals are called upon to work according to the interest of the public. They are required to have a legitimate interest of the clients, financial institutions, governments, investors, employees, employers, business, and finance community and other stakeholders who rely upon the integrity and objectivity of the accounting profession in support of the functioning of the business. Accountants are supposed to consider the potential threats of the fundamental principles and ensure that there are safeguards that will preserve their ability to comply with the principles.
The fundamental principles that accountants must comply with include integrity which is responsible for being straightforward as well as honesty in all relationships. Objectivity allows the accountant to be less biased, to avoid conflict of interest and undue influence on their professional undertaking. Professional competence and due care are concerned with professional knowledge as well as the skill set required by the employer based on the available legislation, techniques, and practice. Accountants must, therefore, act diligently while considering the professional and technical standards. Confidentiality is another principle which calls upon the accountants to maintain the acquired information in a confidential way without disclosing it to third parties. Professional behavior is another principle that calls upon accountants to comply with the applicable laws and regulations and avoid incidences that discredit the profession (Icaew, 2018).
Completing the financial statements within the timeframe and breakeven implies that the books of accounts will not represent and true and fair view of the company. The revenues and assets will be overstated leading to the assumption that the company is performing better. Investors will rely on the financial statements to invest in the IPO and the employees will also use the same in their work. The management might adjust its targets assuming that the financial statements reflect a true and fair view of the operations of the company. Relying on the company’s results will be misleading and the user is likely to make the wrong decision based on the financial results of the company. If it is realized in future that the company inflated its revenues and assets to show impressive results for the year and to attract more investors in the forthcoming initial public offering, the outcome will not be good for the management and the accountant. There will be public outcry and the professional and regulatory bodies will require an appropriate explanation from the company as to why it chose to give misleading information. The reputation of the company will be affected and it will be difficult to change the negative perception generated by the public.
From the foregoing discussion, it is appropriate for HighTech Inc to report its financial statements in a truthful way to avoid generating negative attention from the regulators, professional bodies, and the public. The company must understand the impact of presenting inflated financial statements and why it should avoid the temptation to generate impressive results which are not reflective of the actual performance of the company. Sally should understand relevant principles and guidelines that must be adhered to by professional accountants. She has a responsibility to the public and should not allow the interest of the management to override her desire to use professional ethics in her work. Sally, therefore, should meet with the CEO and CFO and discuss the impact of the inflated record and why they should not be included in the financial statement. She should understand her duty of professional responsibility to the public and other stakeholders. Similarly, she has a responsibility to ensure that the financial statements are truthful and prepared in a transparent way. They should also be prepared using highest levels of integrity and honesty. Sally must adhere to ethical principles and the provisions of the generally accepted accounting principles. The financial statements must be prepared once a decision has been arrived at between Sally, the CEO, and the CFO.
References
AICPA. (2012). Code of professional conduct and bylaws. Retrieved from https://www.aicpa.org/Research/Standards/CodeofConduct/DownloadableDocuments/2012June1CodeOfProfessionalConduct.pdf
Berk, J., & DeMarzo, P. (2016). Corporate Finance, Global Edition . Harlow, United Kingdom: Pearson Education Limited.
Brooks, L., & Dunn, P. (2012). Business and professional ethics for directors, executives & accountants . South-Western: Cengage Learning.
Icaew. (2018). Code of Ethics A. Retrieved from https://www.icaew.com/membership/regulations-standards-and-guidance/ethics/code-of-ethics-a
IFAC. (2016). Handbook of the code of ethics for professional accountants . New York: International Federation of Accountants.
Jui, L. (2013). Roles and Importance of Professional Accountants in Business | IFAC. Retrieved from https://www.ifac.org/news-events/2013-10/roles-and-importance-professional-accountants-business
Schnackenberg, A., & Tomlinson, E. (2016). Organizational Transparency. Journal Of Management , 42 (7), 1784-1810. doi: 10.1177/0149206314525202
