The accounting department is the custodian of an organization’s integrity. Those that work in this department need to demonstrate high levels of accountability and ethical conduct. It is important to note that accountants are often confronted with situations which test their principles and commitment to ethical standards. When faced with these situations, these processionals should remember that the ethical foundation of their organization rests on their conduct. They should endeavor to comply with all relevant ethical standards and guidelines.
Accounting Problem
Linbarger Company is confronted with an accounting problem that requires an urgent solution. This problem mainly concerns disclosure. The disclosure principle in accounting requires firms to reveal all accounting details (Weygandt et al., 2004). The purpose of this revelation is to enable other stakeholders to evaluate the financial situation of the firms. In the case of Linbarger Company, the disclosure is needed to allow the insurance company to determine if Linbarger Company is meeting the terms of the loan agreement. As it ponders on whether to disclose that its cash balance is below the $200,000 required under the loan agreement, Linbarger Company faces some ethical questions. These questions are discussed below.
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Ethical Considerations
The accounting problem that Linbarger Company faces gives rise to various ethical issues. The need to protect the company’s operations and future is among the considerations that the company must make. This is an ethical consideration because one of the ethical obligations of companies is to safeguard the interests of shareholders, employees and other stakeholders. It is feared that should the company disclose that its cash balance for June fell below the required amount, the firm’s operations could suffer. The employees could lose their jobs while shareholders lose their investment. Another ethical consideration that the company needs to make concerns complying with financial regulations and standards. As noted above, firms are required to apply the principle of disclosure. The need to disclose all its financial details is an ethical consideration because it impacts on the firm’s accounting practices and relationships with such stakeholders as the insurance company. Should it be discovered that Linbarger doctored its records, it could face criminal action. Therefore, the issues that the company faces are both legal and ethical.
Possible Negative Impacts
One of the options available to the assistant controller is to keep the books open for a day longer as instructed by Lisa. Should the assistant controller defy this instruction, a number of negative consequences will result. Lisa warns that the company would default on its loan repayment. She also raises concern that the firm may be forced to stop operations. Another possible negative impact is a damaged relationship with the insurance company. Overall, the firm’s operations and financial position would be irreparably compromised if the assistant controller refuses to act as instructed by Lisa.
Victims of Negative Impacts
The negative impacts identified above will affect a number of stakeholders. The company’s employees will be the primary victims. Lisa cautions that if the company defaults, all the employees will lose their jobs. This warning is sound since it is not uncommon for a company to lay off significant number of employees when faced with a difficult financial situation. The company in general will also suffer. As its operations stop, the firm will be unable to generate revenue and value for shareholders, employees and other concerned stakeholders. The insurance company will also suffer. This company is counting on Linbarger Company to honor its debt obligations. If it defaults on the loan payment, the insurance company may be forced to go to such lengths as auctioning Linbarger Company’s assets as it seeks to reclaim the amount owed. While auctioning the assets will enable the insurance company to reclaim the loan, this measure will do little to repair the relationship between the two companies.
Alternative
There is no doubt that the situation that Linbarger faces is complex and difficult. However, there are alternative approaches that the firm could pursue. It is recommended that the company should enter into negotiations with the insurance company. While most loan agreements are governed by strict terms, there are usually provisions for negotiations (Ferran, 2008). When faced with a situation that forces it to default, firms are strongly advised to negotiate with the providers of the loan. For example, a firm could ask for the term of the loan to be adjusted. Instead of keeping its books open for longer, Linbarger Company should simply approach the insurance company for an extension of the June calendar. As it does this, it will spare itself of the need to violate ethical standards while protecting its relationship with the insurance company.
In conclusion, in all their operations, firms should endeavor to follow ethical guidelines. Violations of these guidelines often result in negative outcomes. When faced with ethical dilemmas, the companies should consult their own codes of ethical conduct as well as industry guidelines. As they do this, they will gain insights regarding how to resolve the ethical issue. Linbarger Company should remain committed to its ethical principles despite the difficult ethical situations that it may face.
References
Ferran, E. (2008). Principles of corporate finance law. Oxford: Oxford UP.
Weygandt, J. J., Kieso, D. E., DeFranco, A. L., & Kimmel, P. D. (2004). Hospitality Financial accounting. Hoboken, NJ: Wiley.
