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Accounting Ethics - Xiaping Trading Company financial stmts

The board of directors of Xiaping Trading Company is meeting to discuss the past year's results before releasing financial statements to the bank. The discussion includes this exchange:

Wai Lee, company owner: "This has not been a good year! Revenue is down and expenses are way up. If we are not careful, we will report a loss for the third year in a row. I can temporarily transfer some land that I own into the company's name, and that will beef up our balance sheet. Brent, can you shave $500,000 from expenses? Then we can probably get the bank loan that we need."

Brent Ray, company chief accountant: "Wai Lee, you are asking too much. Generally accepted accounting principles are designed to keep this sort of thing from happening."

Requirements
1. What is the fundamental ethical issue in this situation?
2. How do the two suggestions of the company owner differ?

Solution Preview

The fundamental ethical issue is that Wai Lee, the owner, is suggesting to the chief accountant that the financial statements be falsified in order to meet the financial expectations of the bank in order to secure a loan.

The response by the accountant is that when generally accepted accounting principles are used, they would preclude falsification of the financial statements to occur.

I think that both comments are misunderstood and are much too 'black and white' for the problem at hand.

If I ...

Solution Summary

The 345 word solution includes a lengthy list of alternatives that could be pursued by both the owner and the accountant to understand and reduce losses.

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