Case Study: Ethical Issues in Financial Reporting at Brady Industrial

Verified

Added on  2019/10/31

|4
|674
|378
Case Study
AI Summary
This case study analyzes an ethical dilemma in financial reporting at Brady Industrial Products. The assistant accountant, Sharon Rock, identifies that the company's current ratio falls below the required level as per a loan agreement with Localtown Bank. The accountant, Tim O'Shea, decides to manipulate the financial data by misclassifying a non-current receivable as a current receivable to meet the terms of the loan agreement. The assignment explores the ethical issues involved, specifically highlighting the material misstatement of assets in the financial statements, which could influence the economic decisions of the loan provider. It emphasizes that the misrepresentation of financial information constitutes fraudulent financial reporting, violating the concept of materiality as defined by AASB 1031. The analysis also references APESB 110, which stresses the need for an independent review of financial statements. The document underscores the importance of ethical conduct in accounting and the potential consequences of manipulating financial data.
Document Page
Running head: ACCOUNTING AND FINANCIAL REPORTING
Accounting and Financial Reporting
University Name
Student Name
Authors’ Note
tabler-icon-diamond-filled.svg

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Document Page
2
ACCOUNTING AND FINANCIAL REPORTING
Answer to Question 3:
Main Ethical Issues Involved:
Sharon Rock, working as the assistant accountant of the company Brady Industrial Products
reviewed the financial statements of the company and discussed the same with the same with
respective accountant of the company Tim O’Shea. Analysis of the financial statements
reflected the fact that the company had acquired a loan with the Localtown Bank. As per the
terms of the loan contract, the company was supposed to maintain a minimum current ratio of
(1.2:1). However, examination of the pertinent figures in the financial statements revealed the
fact that the current assets (without inclusion of inventories) and current liabilities of the firm
was in actual fact standing at $1100000 and $1000000 respectively. This showed that the
current ratio of the firm Brady Industrial Products stood at (1100000/1000000=1.1) that is
lower than what is required as per the terms of the loan agreement. Sharon identified the issue
and discussed on this specific matter with Tim O’Shea.
However, Tim O’Shea decided to manipulate the financial data and falsely represent the same
in the financial reports for meeting the terms of the loan agreement as there was dearth of
time to correct the figures. According to Tim, the company could otherwise sell some of their
inventories or else acquire some receivables to correct the current ratio of the firm. Instead,
the accountant thought of representing the huge loan of amount $120000of the business that
is in actual non-current receivable as current receivable. Thus, this act can be identified as an
ethical issue that involves material misstatement. This can be stated as material misstatement
as this misstatement of assets in the financial statement might affect the specific economic
decision of the user particularly the loan provider (bank) in this case (Mališ and Novak2016).
The material misstatement is associated to false representation of financial information in the
Document Page
3
ACCOUNTING AND FINANCIAL REPORTING
financial assertions of the firm Brady Industrial Products. This can be considered as an
ethical issue as it involves fraudulent financial reporting that intentionally carried out for
misleading the users of the information. As per AASB 1031 (“materiality”) para- 9, this
overstatement/understatement of assets in the financial reports of the firm Brady Industrial
Products can be referred to as material (Cameron 2014). This can be considered as material as
the omission, misrepresentation or else non-disclosure of the specific information on current
assets has the ability, both individually as collectively to affect the economic decisions of
different users relying on the financial reports and can affect influence the accountability by
the management else wise the governing unit of the entity (Mališ and Novak2016). In this
case, the concept of materiality also affects the way a specific item or else an aggregate of
specific items is necessary to be recognized, enumerated or esle disclosed as per the
Australian Accounting Standards Board. APESB 110 (Code of Ethics for Professional
Accountants) declared by the Accounting and Professional Ethical Standards Board also
states about the need for independent review of the financial statements that is essentially in
this present business case (Sutherland 2017).
Document Page
4
ACCOUNTING AND FINANCIAL REPORTING
References
Cameron, R., 2014. Applying the Materiality Concept: The Case of Abnormal
Items. CORPORATE OWNERSHIP & CONTROL, p.428.
Mališ, S.S. and Novak, A., 2016, January. Assessments of the risks of material misstatement
due to fraud. In 5th International Conference “Vallis Aurea”: focus on Research and
Innovation.
Sutherland, D.W., 2017. Independent audit report. Newsmonth, 37(3), p.19.
chevron_up_icon
1 out of 4
circle_padding
hide_on_mobile
zoom_out_icon
[object Object]