Case 3-3 at the end of Chapter Three of Ethical Obligations and Decision Making in Accounting provides an example of how legal and ethical issues affect corporate governance. Examining the legality, Sarbanes-Oxley Act, and ethicality of the activities of this case will ensure the activities of United Thermostatic Controls are equitable to internal and external stakeholders. Corporate governance is in place, as proof by the internal auditor discovering the questionable transactions.
Legal issues and laws
There does not appear to be any legal issues or laws pertaining to this case that are violations. United Thermostatic Controls did ship the items before the end of the year, so they are correct in reporting the sale during the current year. Whether or not the customer agreed to receive shipment does not have any legal ramifications. However, manipulating numbers to ensure the company looks favorably is illegal. Considering the company is about to go public, reporting these sales in this manner could mislead investors. The Sarbanes-Oxley Act is a federal law that applies to this case, and one in which publicly traded companies should pay close attention to. S
This law requires management to certify the accuracy of financial information. Manipulating financial statements to ensure meeting financial predictions is unethical and illegal. There are several important sections in this law, but the main one applying to this case is section 401. Section 401 requires “each financial statement filed with the SEC to reflect all material correcting adjustments that have been identified by the audit firm in accordance with GAAP and the rules and regulations of the commission” (Mintz & Morris, 2011, pg.285). GAAP procedures circumvented in this case portray United Thermostatic Controls in a favorable light.
Ethicality of case events
The ethicality in the events of this case needs a closer look. . Even though the actions were not illegal, they were unethical. There was pressure to achieve sales goals and maximize revenues and earnings before United Thermostatic Controls goes public. Frank Campbell, the director of the southern sales division, is worried about the effect of reporting these sales in the following year because it may effect his and other managers’ bonuses, and share of the profits.
Even though the customers do not want the items shipped yet, he initiates shipment and pressures the accounting department to record transaction in current year. His actions reflect a concern for his own position and do not reflect the best interest of the public. This causes a huge ethical dilemma for United Thermostatic Controls. Technically the transactions are not illegal, but the intent caused the ethical problems to occur. Wanting to manipulate the financial statements to help ensure the company’s statements look good is questionable at best. Contacting the customers and trying to obtain approval would have been a better course of action for him. This will also take away income from the next year.
Internal and external stakeholders
The activities in this case were not equitable to the internal and external stakeholders. The activities were not fair to these stakeholders, especially future investors who would believe the company has more income. Reporting these transactions in the current year gives the investors and other stakeholders an inaccurate picture of the financial health of the organization. Another problem is with the customers themselves. Shipping the items early or as a partial shipment may upset the customers. This could put the customers in a position to report the purchase at the end of the year, which reduces their income. Several stakeholders interest are affected by the decision to record the transactions, and the activities need to reflect their interests.
The next step is to inform the audit committee who can resolve any differences in management. Informing them is an appropriate course of action concerning corporate governance. Looking to an outside source will help resolve any issues of internal bias. The company and board of directors have a personal interest in the stock prices. The temptation to report the additional income to ensure high stock values will make external contact the best option. This will prevent any bias in regard to stock values or company bonuses.
In conclusion, the ethical dilemma that occurred with United Thermostatic Controls affected many stakeholders. The legal and ethical issues could cost the company investors, customers, and put them in jeopardy with the SEC. An important area to consider is Section 401 of the Sarbanes-Oxley Act. Information gets presented fairly in order for publicly traded companies to remain in compliance. Manipulating information for personal gain or favor is punishable by law, and should be avoided at all costs.
Mintz, S. M., & Morris, R. E. (2011). Ethical Obligations and Decision Making in Accounting (2nd ed.). New York, NY: McGraw-Hill/Irwin.