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Accounting Discretion, Assessment Example

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Assessment

Simon is taking this action for one reason and that is to increase the credit worthiness of the department store. This is through two ways. One by recording a fictitious sale of $ 10,000 she overstates the receivables account by $ 10,000. Similarly the exclusion of the salaries owed and the expired insurance from the accounts understates the accounts payable by $ 1300. These adjustments effectively overstate the assets while understating the liabilities and effectively giving the statement of financial position a healthy look. The action taken by Simon is not ethical. The International Accounting Standards (IAS) regulations require that financial statements give a true and fair view of the status of the business. Simon contravenes this by disregarding the financial statement assertion of Cut-off. This assertion requires that transactions are recognised in the period that they occurred and not transferred to another period. The users of the accounts will therefore be misled by the way these transactions are recorded. This is against the accounting ethics.

The party helped by the action is the proprietor of the business. This is because the credit providers will be misled into advancing the credit facilities that Simon would not have otherwise obtained if these alterations were not done to the accounts. The party harmed by the action is the creditor; this is because they will be hoodwinked into advancing the credit facilities based on the fictitious accounts. These creditors could be either financial institutions or trade creditors. The assertion that accountants owe a duty of care to all users of financial statements requires that financial statements are recorded to reflect the substance of the transactions hence clearly portraying the economic implications of the transactions (BPP 2009). The accountant is required to maintain sincerity in all the transactions and ensure that the manner in which transactions are recorded can stand scrutiny from a third party as well as withstand a common sense test (AICPA Code of Professional Conduct 1988). In view of the stipulations of the regulatory framework, I would not carry out these instructions since they go against the code of ethics. This is especially in view of the events that led to the Enron scandal that occasioned its collapse. These alterations to the accounts amount to creative accounting and they eventually catch up with companies in future causing their collapse. As noted in the Enron case the major factor that destroyed the market confidence in Enron’s share and eventually occasioned their downfall was the misuse of the off balance sheet financing and their efforts to correct the misreporting of the previous periods (Konzelman & Deakin 2003 ).  Therefore accountants should ensure they adhere to the ethical requirements.

References

AICPA Code of Professional Conduct. (1988). Jersey City, NJ: American Institute of Certified Public Accountants.

BPP Learning Media (2009). Management Accounting. London: BPP publishers.

Deakin, P.  Simon, H. Suzanne, J. Konzelmann, P. (2003). “Learning from Enron” ESRC Centre for Business Research University of Cambridge (Working Paper No 274) Retrieved on 05 August 2009. From: http://www.cbr.cam.ac.uk/pdf/wp274.pdf..

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