For publicly traded companies, the Sarbanes-Oxley Act prescribes fines and priso

Question

For publicly traded companies, the Sarbanes-Oxley Act prescribes fines and prison time for knowingly falsifying financial information. Further, investors of the company may be able to successfully sue the company and its owners for civil damages. Small-business owners should exercise caution, as not understanding accounting practices and standards is not a defense for fraudulent reporting. If a reasonable person believes a manger should have known about fraud in the business, this may be enough to allow the jury to side with the plaintiff. Unified Health Corporation has several current notes receivable on its year-end balance sheet. While collection seems certain, it may be delayed beyond one year - which means that it should be considered long-term. Because of this, you, as the controller of the company, want to re-classify these notes as non-current. Health's treasurer also thinks that collection will be delayed but does not favor re-classification because this will reduce the current ratio from 1.5:1 to .8:1. This reduction in current ratio is detrimental to company prospects for securing a major loan with the bank. Plus the treasurer wants to place an additional stock offering to investors by year-end. Are any stakeholders really affected by this re-classification if the notes are collected on time? What would your actions be as the controller who works for the treasurer For publicly traded companies, the Sarbanes-Oxley Act prescribes fines and prison time for knowingly falsifying financial information. Further, investors of the company may be able to successfully sue the company and its owners for civil damages. Small-business owners should exercise caution, as not understanding accounting practices and standards is not a defense for fraudulent reporting. If a reasonable person believes a manger should have known about fraud in the business, this may be enough to allow the jury to side with the plaintiff. Unified Health Corporation has several current notes receivable on its year-end balance sheet. While collection seems certain, it may be delayed beyond one year - which means that it should be considered long-term. Because of this, you, as the controller of the company, want to re-classify these notes as non-current. Health's treasurer also thinks that collection will be delayed but does not favor re-classification because this will reduce the current ratio from 1.5:1 to .8:1. This reduction in current ratio is detrimental to company prospects for securing a major loan with the bank. Plus the treasurer wants to place an additional stock offering to investors by year-end. Are any stakeholders really affected by this re-classification if the notes are collected on time? What would your actions be as the controller who works for the treasurer For publicly traded companies, the Sarbanes-Oxley Act prescribes fines and prison time for knowingly falsifying financial information. Further, investors of the company may be able to successfully sue the company and its owners for civil damages. Small-business owners should exercise caution, as not understanding accounting practices and standards is not a defense for fraudulent reporting. If a reasonable person believes a manger should have known about fraud in the business, this may be enough to allow the jury to side with the plaintiff. Unified Health Corporation has several current notes receivable on its year-end balance sheet. While collection seems certain, it may be delayed beyond one year - which means that it should be considered long-term. Because of this, you, as the controller of the company, want to re-classify these notes as non-current. Health's treasurer also thinks that collection will be delayed but does not favor re-classification because this will reduce the current ratio from 1.5:1 to .8:1. This reduction in current ratio is detrimental to company prospects for securing a major loan with the bank. Plus the treasurer wants to place an additional stock offering to investors by year-end. Are any stakeholders really affected by this re-classification if the notes are collected on time? What would your actions be as the controller who works for the treasurer

Explanation / Answer

  

If the treasurer insists that the notes not be re-classified, the controller will have to decide whether to accept the treasurer's decision, speak with higher-level executives at Health, or take some other action.

  

• Yes, the controller should re-classify the notes from current notes receivable to noncurrent notes receivable. Current assets are those assets that will generate cash within one year, thus notes which cannot be collected within one year should be classified as noncurrent investments.

• If the notes are not classified as noncurrent assets, the current ratio will remain high enough to secure the major loan. Unified Health Corporation benefits, but the lending agency gets a incorrect picture of the financial state of the company and its potential to meet the conditions of its loan. As both the controller and the treasurer recognize that delay of the collection has an impact on the conflicting economic interests of Health and its lending agency, the decision to re-classify has ethical dimensions.

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