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Ethical Issues in Financial Accounting: Wayne Terrago Controller for Robbin Industries

Ethics Case
BYP 1-7

Wayne Terrago, controller for Robbin Industries, was reviewing production cost reports for the year. One amount in these reports continued to bother him-advertising. During the year the company had instituted an expensive advertising campaign to sell some of its slower-moving products. It was still too early to tell whether the advertising campaign was successful. There had been much internal debate as how to report advertising cost. The vice president of finance argued that advertising costs should be reported as a cost of production, just like direct materials and direct labor. He therefore recommended that this cost be identified as manufacturing overhead and reported as part of inventory costs until sold. Others disagreed. Terrago believed that this cost should be reported as an expense of the current period, based on the conservatism principle. Others argued that it should be reported as Prepaid Advertising and reported as a current asset. The president finally had to decide the issue. He argued that these costs should be reported as inventory. His arguments were practical ones. He noted that the company was experiencing financial difficulty and expensing this amount in the current period might jeopardize a planned bond offering. Also, by reporting the advertising costs as inventory rather than as prepaid advertising, less attention would be directed to it by the financial community.

A) Who are the stakeholders in this situation?
B) What are the ethical issues involved in this situation?
C) What would you do if you were Wayne Terrago?

Solution Preview

Who are the stakeholders in this situation?

Many stakeholders have need for accounting information in order to make important decisions. These users include investors, creditors, management, governmental agencies, labor unions, and others. Each of these groups of external decision-makers requires unique information to be able to make decision about the reporting enterprise.
Thus the primary role of accounting information is to provide useful information for decision-making purposes, it is sometimes referred to as a means to an end, with the end being the decision that is helped by the availability of accounting information.

What are the ethical issues involved in this situation?

Business ethics is the branch of ethics that examines ethical rules and principles within a commercial context; the various moral or ethical problems that can arise in a business setting; and any special duties or obligations that apply to persons who are engaged in commerce. In recent times, this word has been referred to as an oxymoron. Those who are interested in business ethics examine various kinds of business activities and ask, "Is the conduct ethically right or wrong?"

It is clearly good that businesses should seek to minimize their negative social and environmental impact resulting from their economic activity. Some of the variables considered by Business Ethics in coming up with its list are

1. Environment
2. Community relations
3. Employee relations
4. Share holders
3. Customer relations
4. Non U.S. stakeholders
5. Minorities and Women

There is no strict "formula" for how a company is evaluated. All available measures, news articles, lawsuits, annual reports, etc. are compiled for each company -- including input from the company itself -- and a researcher.

The corporate's social responsibilities encompasses:

* The environment it operates in
* The employees with which it ...

Solution Summary

This solution provides analysis of the case study in 1212 words with references and examples to historical cases. This solution also provides a hypothetical corporate code of conduct that may be applied in this case.

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