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- 10 Marks
Question
Femmy PLC operates in a city where a major insurance company has just announced a restructuring that will lay off 4,000 employees. For Femmy PLC, accounts receivable represents one of the major assets of the company. Although the company’s annual uncollectible accounts are not out of line, they are material in size. The company is about to submit its application for a bank loan. Sales and net income have declined in the past year, and some customers are falling behind in settling their accounts.
A steady financial performance is necessary to be able to secure the anticipated bank loan. Therefore, management felt there is the need to underestimate the uncollectible accounts this year to show a small growth in earnings. They believe that future successful years will average out the losses.
More so, since the company has a history of success, the adjustments are seen as mere accounting measures and estimates. The Chief Accountant viewed management’s action as unethical.
Required:
i. Discuss the meaning of unethical acts by organizations. (5 Marks)
ii. What should the Chief Accountant do under this circumstance? (5 Marks)
Answer
i. Meaning of Unethical Acts by Organizations (5 Marks)
Unethical acts by organizations refer to actions or practices that violate established ethical principles, professional standards, or societal norms in pursuit of organizational goals. These acts are often motivated by self-interest, financial gain, or the desire to manipulate outcomes. Examples include:
- Misrepresentation of Financial Information
- Deliberately manipulating accounting estimates or reports to achieve a desired financial result, such as inflating earnings or understating liabilities.
- Violation of Stakeholder Trust
- Unethical acts erode the confidence of stakeholders, including investors, creditors, and employees, in the organization’s integrity and reliability.
- Non-Compliance with Standards
- Actions that breach regulatory requirements, professional codes of conduct, or accounting standards, such as International Financial Reporting Standards (IFRS).
- Short-Term Gain Over Long-Term Integrity
- Sacrificing ethical practices for immediate benefits, like securing a bank loan, at the expense of long-term organizational sustainability and reputation.
ii. What Should the Chief Accountant Do Under This Circumstance? (5 Marks)
The Chief Accountant has a responsibility to uphold ethical principles and professional standards. The following actions are recommended:
- Express Ethical Concerns to Management
- Clearly communicate to management that underestimating uncollectible accounts is unethical and contravenes accounting principles, specifically the faithful representation principle under IFRS.
- Advocate for Accurate Reporting
- Recommend preparing financial statements that accurately reflect the company’s financial position, emphasizing the potential long-term consequences of misrepresentation, such as reputational damage and regulatory penalties.
- Consult the Organization’s Code of Conduct
- Refer to the organization’s code of conduct and professional standards, such as those of ICAN or IFAC, to support the stance against unethical behavior.
- Report to Appropriate Authorities Within the Organization
- If management insists on unethical practices, escalate the matter to the audit committee, board of directors, or any designated whistleblowing channels.
- Consider External Reporting if Necessary
- If internal escalation does not resolve the issue and the act poses a significant risk to stakeholders, the accountant may need to report the matter to external regulators, adhering to whistleblowing guidelines while ensuring legal protection.
- Resignation as a Last Resort
- If all attempts to prevent unethical actions fail, and the accountant’s professional integrity is at risk, resigning from the position may be the only ethical option.
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