Question

Ms. Emery is the CFO of a small manufacturing company and will be leaving her current position after the first of the year to accept a new job offer.  She has not yet informed her current employer of this matter because she is concerned that her year-end incentive bonus may be affected if her boss learns of her plan to leave.  She knows that waiting to receive her bonus to tell her boss is less than honorable, but she believes she has been underpaid for a long time.

Ms. Emery’s bonus is based on a percentage of net income.  Her company recently introduced a new product line that required substantial start-up costs.  She is fully aware that GAAP requires these costs to be expensed in the current accounting period, but no one else in the company has the technical expertise to know exactly how the costs should be treated.  She is considering misclassifying the start-up costs as product costs.  If the costs are misclassified, net income will be significantly higher, resulting in a nice boost in her incentive bonus.

How do you think the misclassification could mislead an investor or creditor regarding the company’s financial condition and indicate your opinion of what should happen to Ms. Emery if she does indeed misclassify these costs in relation to the ethical professional code that accountants are required to uphold.

Answer 1

1. With the erroneous classification, some of the startup cost would be included in the inventory account of the balance sheet, rather than being recognized as expenses in the income statement. This would increase net income and net assets and lure investors to invest into the company.

2. Ms. Emery has violated standards of "mitigate the actual conflict of interest and avoid an apparent conflict of interest' as well as 'communicate information fairly and objectively' of AICPA which can lead to (1) acquit the CPA: (2) admonish the CPA; (3) suspend the CPA's membership in the state society and the AICPA for up to two years; or, (4) expel the CPA from the state society and the AICPA.