CA1-13
(Rule-Making Issues) When the FASB issues new pronouncements, the implementation date is usually 12 months from date of issuance, with early implementation encouraged. Karen Weller, controller, discusses with her financial vice president the need for early implementation of a rule that would result in a fairer presentation of the company’s financial condition and earnings. When the financial vice president determines that early implementation of the rule will adversely affect the reported net income for the year, he discourages Weller from implementing the rule until it is required.
Instructions
Answer the following questions.
(a) What, if any, is the ethical issue involved in this case?
(b) Is the financial vice president acting improperly or immorally?
(c) What does Weller have to gain by advocacy of early implementation?
(d) Which stakeholders might be affected by the decision against early implementation?
Solution
(Rule-Making Issues) When the FASB issues new pronouncements, the implementation date is usually 12 months from date of issuance, with early implementation encouraged. Karen Weller, controller, discusses with her financial vice president the need for early implementation of a rule that would result in a fairer presentation of the company’s financial condition and earnings. When the financial vice president determines that early implementation of the rule will adversely affect the reported net income for the year, he discourages Weller from implementing the rule until it is required.
Instructions
Answer the following questions.
(a) What, if any, is the ethical issue involved in this case?
(b) Is the financial vice president acting improperly or immorally?
(c) What does Weller have to gain by advocacy of early implementation?
(d) Which stakeholders might be affected by the decision against early implementation?
Solution
(a) Inclusion
or omission of information that materially affects net income harms particular
stakeholders. Accountants must recognize that their decision to implement (or
delay) reporting requirements will have immediate consequences for some
stakeholders.
(b) Yes.
Because the FASB rule results in a fairer representation, it should be
implemented as soon as possible—regardless of its impact on net income. SEC
Staff Bulletin No. 74 (December 30, 1987) requires a statement as to what the
expected impact of the standard will be.
(c) The
accountant’s responsibility is to provide financial statements that present
fairly the financial condition of the company. By advocating early
implementation, Weller fulfills this task.
(d) Potential
lenders and investors, who read the financial statements and rely on their fair
represen-tation of the financial condition of the company, have the most to
gain by early implementation. A stockholder who is considering the sale of
stock may be harmed by early implementation that lowers net income (and may
lower the value of the stock).
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