Financial Accounting Theory and Practice

Vinal Barbaros, the controller of Smith Construction, has two options available in this case either he can understate the cost statement to make his boss happy or he can be an ethical person and refuse to do any adjustments, the end result of which will be that he will be forced to leave the job. However, these two options should be evaluated in detail. The first option is that Barbaros should understate the costs as instructed by his boss, Michael Wolman. This option has numerous ethical implications for the stakeholders.

Firstly, the stakeholders in the company including the management will get favorable financial statements which will help the company in repaying its loan to the National Bank of Australia. Secondly, by repayment of its loan installments on time, the company can renew a $2 million loan which will help Smith Construction in many ways. The effect of this option to Barboras personally is that he will get an inducement of 5% to be added to his salary which is a great incentive. Secondly, it is also reflecting that Wolman has no intentions of firing him now.

However the problems which the company is facing will not be solved if Barbaros accepts to understate the costs. The problem will further aggravate if the auditors find out the discrepancy and present the report to National Bank of Australia. In this case, the bank will not renew the loan for the company. So though this option is beneficial for Barbaros and the company, however it is ethically and morally wrong and can have major negative implications. Second option which is available to Barbaros is that he can refuse to understate the cost.

If he exercises this option, he might lose his job and this will leave the company in further financial distress. This is because if the same costs are shown in the financial statements, National Bank of Australia will definitely reject the renewal of loan. So in all this option is bad for Barbaros and the company as a whole. Ethical Implications Ethically this option is wrong because in simple terms, it is cheating and in technical jargon, people call it window dressing. This is done to portray a company’s financial position better than what it actually is. Ethically it is wrong according to the theory of justice.

Ethics of justice involve moral choices and these choices are based on the effect a choice has on other people. A choice is morally correct if it is damaging least number of people. In this case if Barbaros accepts 5% inducements then this discussion will have negative implications for very few people. Secondly, according to utilitarianism, an action is morally correct if it is having positive implications for most number of people. This action is also correct if we evaluate it using utilitarianism as it is helping the company overcome its financial constraints.

Being ethical always look like a favorable response, however in most cases, it is not the best possible response. Though according to teleological perspective taking inducement is right option but if we evaluate it according to deontology, it is not a right option and the person should act ethically no matter what the consequences are. ANSWER 2 It is important to understand the distinction between teleological perspective and deontological perspective. According to teleological perspective, an action is right if it has positive consequences and vice versa i. e. an action should be judged according to its consequences.

On the other hand, deontology focuses more on individual moral duties and rules. (About. Com 2010) If Barbaros rejects the 5% inducement under teleological perspective, then the justification he might give is that if the auditors discover the error/understatement of cost that can create further problems for the company in terms of relationship with the auditors, and secondly in terms of bank’s rejection to renew the loan. ANSWER 3 APES 110 Code of Ethics fro Professional Accountants highlights numerous principles which accountants’ must follow in order to give an objective analysis of the company.

The fundamental principles which are discussed in this document are Integrity, objectivity, professional competence, confidentiality and professional behavior. Each of this principle has a series of criteria which should be followed. If Sharon chose to accept the $10000 increase in her salary and modified the report according to the requirements of her supervisor, in that case, she would breach the integrity principle of the code. It says that all members should be honest and straightforward in all professional and business relationships and by accepting inducement; Sharon will be breaching this fundamental principle.

It will also lead to the breach of another fundamental principle which is the breach of professional behavior. The principle demands that all members should comply with all the relevant laws and regulations and maintain good reputation of the profession. Thirdly, section 350 of the code of ethics for professional accountants also mentions that inducements in the form of gifts or inappropriate appeals may be offered to the professional accountants however, they may pose a threat to objectivity and/or encourage illegal/unethical behavior.

Objectivity is at stake because the increase in salary is a bribe which is used to alter the actual findings of a company. ANSWER 4 If we evaluate Sharon’s decision of not accepting the bribe according to the Kohlberg’s framework we can come up with the following analysis: Stage 1 – Obedience and Punishment At this stage Sharon should not accept bribe with the fear of punishment or in an appropriate term with the fear of loss of job. Stage 2 – Individualism and Exchange Here people do something after considering its effect on their lives. In other terms it can be said that people here think in a selfish manner.

Also it is possible that people do certain thing to reciprocate others, even that is only when it is satisfying a person’s own needs. Here if Sharon does not accept the bribe, one of the potential reasons can be self consciousness. If she is happy by not accepting bribe, then she should not accept it rather than accepting it and living with the guilt of it forever. Stage 3 – Interpersonal Relationships At this stage people do things just to conform to the values of the society. If Sharon too tries to be ethical in order to conform to the social values regarding bribe, then she should not accept it.

Stage 4 – Maintaining Social Order When people are mature enough, they make decisions based on the society laws and order and try to abide by it by respecting the authority and following the laws. Here the code of ethics for professional accountants may serve as a deterrent for Sharon. Stage 5 – Social Contract and Individual Rights Social contract is of utmost value at this point. If Sharon discusses this offer with any of her friends, and they all have a negative attitude fro it, then she must rely on their opinions when making such decisions.

Being a part of the society, we need to make decisions which are socially acceptable and are in accordance with the social contract. Stage 6 – Universal Principles This is the last stage of Kohlberg’s development model. Here he expects people to be mature enough to make decisions based on their personal beliefs about morality and ethics even if they are not aligned with the laws. This is an extreme case where people are expected to be so mature that they make up their own standards of morality.

It Sharon does not accept the bribe, then she is at the fourth stage of Kohlberg’s Moral development order where people do certain things in accordance with the social order. They value rules and regulations the most. I think Sharon is at this stage because she is very young auditor. At this point we cannot say that she has developed the universal principles for moralities. Secondly, I do not think she is at the 5th stage of development because there is no mention of Sharon consulting this option with any of her friends or family.

Jimmy on the other hand is at the third stage i. e. the interpersonal relationships stage because he is willing to impress his seniors rather than doing the right work. Since he wants to appear nice and be good in front of his supervisors, this shows that he is not mature enough and rather than evaluating things on moral grounds, he relies on other unethical options if they are giving desired results.


Website (2010)Deontological, Teleological and Virtue Ethics. About. com[Internet]. Available from <www. atheism. about. com> [April 30, 2010]