You are the controller for ABC Home Media. During the beginning of January 2017,

Question

You are the controller for ABC Home Media. During the beginning of January 2017, when the company was adjusting and closing the accounting records for the calender year, you were home sick with the flu. You therefore relied on your assistant to complete much of the work. The company reported net income for 2017 of $125,000, down from $140,000 in 2016. In February, after the financial statements have been issued and distributed to the company’s investors and creditors, you discover that your assistant overlooked adjustments to insurance expense, depreciation expense and utilties expense resulting in an overstatement of net income by $12,500. You immediately inform the company president of the overstatement and suggest correcting the errors and re-issuing the financial statements.The company president is concerned that investors were not happy about the lower profits reported in 2017. He feels that 2018 is going to be a better year for the company. Therefore he prefers to keep quiet about the financial statement errors in 2017 and adjust the accounting records for the errors in 2018

Question

a.Who are the stakeholders in this situation?

b.What are the ethical issues in this situation?

c.What would you do as controller in this situation?

Explanation / Answer

a. The primary stakeholders in this situation are the investors in the company.

b. The purpose of financial reporting is to give a true and fair view of the operating results and the financial position of the firm to the stakeholders. This has a significant bearing on their economic decision making and the stock price if the shares are listed.

The ethical issue at hand is the 'agency problem'. Agency problem refers to conflict of interest between the goals of the organization, and that of its executies and employees. The financial controller places his own interest before that of the investors and other stakeholders. He is concerned that if a corrigendum is issued to the investors giving them the true picture, the investors would be angrier at the operating results of the company, as the stock price will fall, and he would be fired, as he has the overall responsibility for true and fair financial reporting. Therefore, in order to save his job, and possibly to avoid even a lower bonus, he prefers to keep quite about the errors.

c. I would prefer to make the stakeholders of the company aware of the errors through a public notice, make the necessary rectification entries, and amend the income statement to incorporate the correct values.

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