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Legality and Ethicality of Financial Reporting Essay Example

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Legality and Ethicality of Financial Reporting

Thus, the deception and violation of transparency make them liable to clients and third parties and could even cause them a negative corporate image in the long run for fraudulent recording.The criteria by which the SOX Act would apply to the case was noted in terms of the potential misstatement in recording the revenue for the period despite knowing that it has not yet been earned. As explicitly noted, there are “four perspectives to help CPAs meet their responsibilities under the act including (1) the actual financial statement misstatement or error, (2) an internal control deficiency caused by the failure in design or operation of a control, (3) a large variance in an accounting estimate compared with the actual determined amount, and (4) financial fraud by management or other employees to enhance a company’s reported financial position and operating results” (Mintz & Morris, 2011, p. From the perspectives, it is clear that Excello Telecommunications would be violating the recording of the revenue recognition principle, as well as the alleged intent to commit financial fraud by the CFO, Tim Reed, to enhance the company’s reported financial condition by the end of the fiscal period December 31, 2010.The financial reporting standards required compliance to the revenue recognition principle as stipulated under the GAAP. It was clear from case facts that due to the fact that for the first time in their earnings history, the earnings estimates would not be met, Tim Reed could be questioned by the Board of Directors and members of the executive time as to the reasons which hampered the realization of projected earnings. As such, to avoid embarrassment and inquest, Reed resorted to conniving with Fuller in trying to find out alternative courses of action which could achieve his defined objectives: to record the $1.2 million as revenue in 2010 as well as to ensure that the course of action could be defensible from the perspectives of GAAP (Mintz & Morris, 2011). The standards on revenue recognition and the apparent commission of financial fraud by the CFO to enhance the financial condition of Excello Telecommunications were evident.If and when Fuller would agree to recognize the revenue as earned within the 2010 fiscal year, the action and entry would be a gross violation of the (American

References

American Institute of CPAs. (2014). AICPA Code of Professional Conduct . Retrieved from aicpa.org: http://www.aicpa.org/RESEARCH/STANDARDS/CODEOFCONDUCT/Pages/default.aspx

Mintz, S., & Morris, R. (2011). Chapter 7 Earnings Management and the Quality of Financial Reporting. In S. M. Mintz, Ethical Obligations and Decision Making in Accounting: Text and Cases. McGraw Hill.

Revenue Recognition Principle. (n.d.). Retrieved from accountinginfo.com: http://accountinginfo.com/study/fs/revenue-101.htm

Stanford University. (2007). Policy Notes: Revenue Recognition – Auxiliaries and Service Centers. Retrieved from standord.edu: http://web.stanford.edu/group/fms/fingate/staff/fundsmgmt/policy_notes/rev_recog_aux_serv_ctr.html

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preview essay on Legality and Ethicality of Financial Reporting
  • Pages: 6 (1500 words)
  • Document Type: Essay
  • Subject: Finance & Accounting
  • Level: Masters
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