Case Study: Ethical Issues in Financial Accounting and Reporting

This case study delves into an ethical dilemma in financial accounting, focusing on the reclassification of non-current receivables as current receivables to meet a bank's current ratio requirement. The analysis explores the ethical implications for both the accountant, Tim, and the company representative, Sharon, considering potential violations of professional codes of conduct and the impact on stakeholders. The assignment emphasizes the potential consequences of such actions, including the erosion of trust and the misrepresentation of financial information. The solution proposes alternative actions, such as negotiating with the receivable business owner for an earlier payment or seeking an exception from the bank, along with proactive measures to avoid similar ethical dilemmas in the future. References from various auditing and accounting sources are provided to support the analysis.

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

repayment date by 2 months. Thus, clarity on this regards need to be taken from the business
owner before reclassification can be done (Deegan, 2014).
Alternately, the bank can be contacted for an exception for the given month which may be
backed by a personal guarantee on the part of the promoters for the outstanding loan amount.
Further, in order to avoid such an ethical dilemma and crisis situation in the future, it makes
sense that going ahead, relevant steps should be taken well in advance so that there is no
default on the current ratio requirement of the bank. This is because in case of default on loan
conditions or use of unethical practices to ensure no breach, there are significant fallouts
which need to be avoided through proactive action (Caanz, 2016).

References
Caanz, S. (2016), Auditing and Assurance Handbook 2016 Australia, 3rd ed., Sydney: John
Wiley & Sons
Deegan, C. (2014). Financial Accounting Theory, 4th ed. Sydney: McGraw-Hill
Gay, G. and Simnett, R. (2012) Auditing and Assurance Services in Australia, 5th ed., Sydney:
McGraw-Hill Education