Ethical Issues in Reclassification of Non-Current Receivables

FINANCIAL ACCOUNTING
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B. The key ethical issue in the given case pertains to falsification of information to the key
stakeholders which amount to dishonesty. This is because by reclassification as non-current
receivables as current receivables, there would be window dressing of accounts in order to
ensure that the necessary covenant levied by the bank regarding current ratio is satisfied.
However, non-indulgence in such a conduct could lead to the closure of the company which
would hurt the interest of the shareholders and employees. Thus, Sharon needs to choose
whether she must engage in unethical conduct or potentially seal the fate of the company,
shareholders and employees (Caanz, 2016).
Another ethical issue pertains to the conduct of the accountant owing to the professional code
of conduct that exists for Tim. Clearly, entertaining such window dressing is in gross
violation of “APES 110 Code of Ethics for Professional Accountants”. Further, Tim must
consider the long term implications of his actions in case he agrees with Sharon’s request of
reclassification of receivable. Such practices can dent the confidence that users place in the
accounting and assurance professionals. Additionally, the decision making of investors and
lenders can be adversely impacted owing to misrepresentation of financial information (Gay
and Simnett, 2016). However, non-indulgence in the reclassification could mean adverse
impact on the interest of clients who Tim has a duty to serve.
As a result, both Tim and Sharon face ethical issues owing to the potential consequences that
could arise from the choices they make in the given scenario.
C. From the above discussion, it is apparent that that reclassification of non-current
receivables to current receivables is not a viable action considering the ethical and potentially
legal implications going forward. As a result, alternative actions need to be explored and
suggested for resolving the current ethical dilemma.
One of the most viable solutions for the current ethical dilemma is to contact the non-current
receivable business owner and offer him/her some discount (if required) on the payment if
there is agreement to shift the payment to 12 months instead of 14 months. This discount
could be 0.5% or 1%. Such an action would allow the firm to correctly reclassify the non-
current receivable as receivable and hence the current arises can be averted. However, it
would be incorrect to assume that the business owner would have no issues with pushing the