Question

BRIEFLY answer the following note the stakeholders and what you would do as the controller in this situation.

As the controller of Take No Prisoners Perfume Company, you discover a misstatement that overstated net income in the prior year's financial statements. The misleading financial statements appear in the company's annual report which was issued to banks and other creditors less than a month ago. After much thought about the consequences of telling the president, Mike Flanary, about this misstatement, you gather your courage to inform him. Mike says, “Hey! What they don't know won't hurt them. But, just so we set the record straight, we'll adjust this year's financial statements for last year's misstatement. We can absorb that misstatement better in this year than in last year anyway! Just don't make such a mistake again.”

Answer 1

The stakeholders include Controller, Mike Flanary, the company employees, banks and other creditors, and company shareholders. The ethical issue involved in the situation is the potential violation of the matching principle.

As controller, you have just issued misleading financial statements. You have acted ethically by telling the company’s president. The president has reacted unethically by allowing the misleading financial statements to stakeholders. It is the Company Management responsibility to disclose the correct financials statement and restate the previous period numbers with proper disclosure as per required GAAP. You should further discuss and make him understand the regulatory requirement and non-disclosure impact with penal provision if any and make sure to account for a prior period adjustment by restating the prior period financial statements