Financial Accounting Case Study: Loan Agreement Ethical Dilemma

This case study delves into an ethical dilemma faced by Sharon Rock, an assistant accountant at Brady Industrial Products. The company is in violation of a loan agreement's current ratio requirement, and the accountant, Tim O'Shea, suggests misclassifying a loan to avoid breaching the agreement. The analysis examines the ethical implications of this action, including potential financial statement fraud and the violation of ethical codes. The case study explores the threats to objectivity and the importance of evaluating compromising conditions. Sharon is advised to use a "threats and safeguards" approach, analyzing the severity of the ethical dilemma and implementing defense mechanisms. The conclusion suggests that because the loan is nearly current and the company has time to recover, the threat might be acceptable. The study emphasizes the need for accountants to adhere to regulations and maintain ethical conduct, offering a practical framework for navigating complex situations.

Running head: FINANCIAL ACCOUNTING
Financial Accounting
University Name
Student Name
Authors’ Note

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Solution to Question D:
Actions that are available to Sharon to resolve the dilemma encountered
Sharon Rock operating as the assistant account of the firm Brady Industrial Products
discussed finalisation of financial assertions of the business with the accountant named Tim
O’Shea as on the period June 30 of the year 2018. As per the given case, Sharon observed
that the company acquired a huge loan from the Localtown Bank and as an element of the
loan agreement, the company Brady Industrial Products had to maintain a specific ratio of
current ratio of 1.2:1. The pertinent figures replicated that current assets was at $1100000,
while current liabilities stood at $1000000. Sharon could identify the breach of the ethical
code of conduct as the company failed to present the minimum ratio for the purpose of loan
contracts. The accountant was of the view that the huge loan of $120000 that the company
made can be categorised as non-current receivable since the loan does not become due in
another upcoming 14 months. Essentially, this is almost certainly close to be a current
receivable. Therefore, the accountant intends to categorise this specific loan to the particular
owner as firm’s current receivable (Cameron and O'Leary 2015). This can help the firm
Brady Industrial Products to avert the issue of the bank’s ratio necessity. In this regard, the
accountant Tim also thought of selling inventories or else exerting pressure on certain trade
debtors to disburse the amount that the company owes to them, although there is not enough
time to correct the ratio of the bank (Christensen et al. 2016).
However, this necessarily reflects the ethical dilemma of overstating the current receivable of
the firm. Essentially, the current case shows a financial statement fraud where a specific
financial item is deliberately misstated or misrepresented with the intent of misleading the
user (bank) and generating a false impression of the financial strength of the corporation
(Chiang and Braender 2014). In this case, the threats that are faced can be analysed in order

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to understand and conduct one ethically. This means analysing the threats to particularly
objectivity that is generated by insufficient self-assessment, risk of incorrectly promoting
employer’s interests or else clients. Evaluation can also be carried out to understand the
undue impact of the client, employer else wise third party. Sharon Rock as an assistant can
also analytically evaluate the comparative severity of diverse compromising conditions
(Ionescu 2016). In case if the evaluated threats can be lessened or eradicated by instilling
defence mechanisms with the outcome that a feasible observer can consent that ethical
regulations are not being disobeyed that is to say that threat level is moderate to be
considered to be acceptable, Sharon Rock can continue the activity of false representation of
current receivables. However, If Sharon Rock enumerates the threat and finds that the ethical
dilemma that is confronted is very clear, rigorous and impractical to ameliorate, and then in
that case it will be a better option for Sharon to escape compromising situation of falsely
representing data to bank.
Thus, it can be hereby mentioned that Sharon can assume the “threats and safeguards” tactic
for achieving compliance with the professional code. Sharon can work towards ascertainment
of a level in which a sensible and well-versed third party can probably conclude by means of
weighing different facts as well as circumstances. Compliance with the regulations need not
compromised. Also, threats also need to be analysed by the accountant that involves
determination of the risk that associations can compromise member’s adherence to the
regulations. Thereafter, assistant accountant Sharon Rock can also analyse safeguards that
refers to evaluation of the actions or else other dimensions aimed at eliminating threats or
reduction of the same for bringing it at the acceptable level. As per the given study, currently
non-current receivable is very much close enough to be current receivable and the company
will also get 14 months time as the loan is not becoming due for repayment before that
specific time period. Therefore, the accountant can consider the threats of such a situation,

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analyse the severity of the threat and act upon accordingly. As the company has time to
recover the receivables and is close to be a current receivable, this threat can be regarded to
be acceptable.

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Reference
Cameron, R.A. and O'Leary, C., 2015. Improving ethical attitudes or simply teaching ethical
codes? The reality of accounting ethics education. Accounting Education, 24(4), pp.275-290.
Chiang, B. and Braender, L.M., 2014. Business Ethics in Public Accounting: Ethical
Dilemmas Faced by Today’s Public Accountants and Its Implication to Accounting
Education.
Christensen, A., Cote, J. and Latham, C.K., 2016. Developing ethical confidence: The impact
of action-oriented ethics instruction in an accounting curriculum. Journal of Business Ethics,
pp.1-19.
Ionescu, L., 2016. Mechanisms for Enhancing Ethical Behavior in the Accounting
Profession. Contemporary Readings in Law and Social Justice, 8(2), p.263.