Question

Kellner Company is a pesticide manufacturer. Its sales declined greatly this year due to the passage of legislation outlawing the sale of several of Kellner's chemical pesticides. In the coming year, Kellner will have environmentally safe and competitive chemicals to replace these discontinued products. Sales in the next year are expected to greatly exceed any prior year's. The decline in sales and profits appears to be a one-year aberration. But even so, the company president fears a large dip in the current year's profits. He believes that such a dip could cause a significant drop in the market price of Kellner's stock and make the company a takeover target.

To avoid this possibility, the company president calls in Melissa Ray, controller, to discuss this period's year-end adjusting entries. He urges her to accrue every possible revenue and to defer as many expenses as possible. He says to Melissa, “We need the revenues this year, and next year can easily absorb expenses deferred from this year. We can't let our stock price be hammered down!” Melissa didn't get around to recording the adjusting entries until January 17, but she dated the entries December 31 as if they were recorded then. Melissa also made every effort to comply with the president's request.

Answer the following questions:

What are the ethical considerations of a) the president's request and b) Melissa dating the adjusting entries December 31?

Can Melissa accrue revenue and defer expenses and still be ethical?

Answer 1

a)The president is requesting something that is not only unethical but illegal. It is dishonest to record future revenues for the current year. For one thing, what if the revenues aren't as high as predicted or don't occur at all?

b)Mellisa likewise did something unethical by misdating the entries even if it was the president’s request. This is entirely against the Generally accepted accounting principals (GAAP) that guides businesses today under the SEC.

No she cannot be ethical, it would be better to just inform shareholders of the current situation.