Ethics in Accounting

What is the accounting problem that the Linbarger Company faces?

The company’s major accounting problem is cash management. Ideally, cash management is the process of collecting and managing cash and investing it in short-term projects (Demkin & American Institute of Architects, 2008). It is a key component in ensuring the financial stability of a company and shields the company from solvency. The company should have maintained a proper planning and coordinated their receipts and payments. The company should have alternative short-term cash funding or not have the agreement with the insurance company if they know they will not be able to honor the agreement.

What are the ethical considerations in this case? Provide rationale for why these are ethical considerations.

The financial vice president Lisa Infante has instructed the assistant controller to keep the cash receipts book open for one additional day for the purpose of June 30 report to the insurance company. Unfortunately, holding the cash receipt book open will result in overstating the cash balance of the company. The exercise though designed to salvage the situation is fraudulent, deceitful, and unethical. Consequently, by not closing the receipts book by June 30, it leads to cumulative errors done willfully to compensate for earlier errors. Ideally, in business ethics, ethical behavior refers to following the accepted principles of doing what is right and avoiding what is wrong. By contrast, the unethical behavior occurs when managers violate the accepted principles of right and wrong. According to Williams (2014), this happens in a case such as lying about the company profits. Overstating about the cash balance results in the vice president and the finance controller lying about the financial status of the company, which is an unethical practice. Even worse is Lisa Infante using her managerial authority and power to influence the financial controller to engage in unethical behavior, which could lead to problems in the future.  

What are the negative impacts that can happen if you do not follow Lisa Infante’s instructions to wait one more day to post the balance?

Lisa Infante is the vice president of the company and has power and authority to direct the assistant controller in charge of general ledger accounting. This means, that the assistant controller has an obligation to obey the vice president. Unfortunately, if the controller does not follow Lisa Infante’s instructions to wait one more day before closing the receipts book, then they might suffer some negative effects. On the other hand, if the controller complies and falsifies the cash balance by holding the receipts book open, this will compromise their integrity. If found out that the controller falsified the cash balance of the company, then they might be prosecuted for a fraudulent report by the insurance company for deceit. In the long run, this might end up ruining the career of the finance controller, due to the fraud cases, which might deny him employment in the future. Additionally, if the assistant controller does not follow Lisa’s instructions and the company does not get the cash balance, then they will default on their loan agreement. Defaulting could lead to the close down of the company and the employees losing their jobs.

Who will be negatively impacted if you do comply? Provide a rationale for why these individuals will be impacted.

Ideally, by agreeing to comply with the vice president’s instructions, the assistant controller will be affected, the company, and the insurance company. The assistant controller might suffer negative effects from Lisa Infante. It is not certain how the insurance company will react if they do not get their cash balance of $200,000. The company might be closed and everyone might lose their jobs.

What is one alternative that you could pursue in this scenario? Support your recommendations with the information you learned in this class.

Engaging in fraudulent accounting is illegal and unethical. Lisa Infante is unprofessional and unethical by trying to involve the assistant controller in unethical practices. By not following Lisa’s instructions, the assistant controller is at risk and risks the entire organization and the employees. However, there are several other ways in which, the assistant controller could propose to pursue in this scenario. Firstly, communication is key in any enterprise. The assistant controller should advise the vice president against holding the books open. Instead, advise Lisa to prepare an accurate report, have the vice president call the insurance company, and ask for a concession from them, which would have allowed them more time to deposit the cash in the account. It can be explained that the low cash balance was only a temporary problem that would be cleared with the deposit of the $150,000 cheque. Of course, they should also not have waited until the last minute and should instead have talked with the insurance company early enough to win their trust. Along with that, although the Linbarger Company has defaulted on their loan agreement, the insurance company would not close a business down immediately. The company would have penalized and avoided engaging in unethical practices. The other alternative is encouraging one of the company’s esteemed customer to make an early payment. The moment the company realized they would not be able to have the $200,000 balance in the account; they should have approached one of their customers to persuade them to make an early payment. In return, the company would have offered a discount for the next sale to the customer who made an early repayment. The other option is to get the cash from a trusted source who could lend the money to the company, with the promise of refunding the money with the next payment from their trusted customers.

References

Demkin, J. A., & American Institute of Architects. (2008). The architect’s handbook of professional practice. Hoboken: Wiley.

Williams, C. (2014). Effective management: A multimedia approach. Mason, OH, USA: South-Western Cengage Learning.