Assignment 2 ACC 207 Due Oct 30, 2017: Using The Guidance Di

Assignment 2acc 207due Oct 30 2017using The Guidance Discussed In Cl

Using the guidance discussed in class as well as materials within the textbook, consider the following 2 ethical cases and respond to the questions noted (total of 7 questions). Responses will be graded for thoughtfulness and rationale (a yes/no response is not sufficient). Questions 3, 5, and 6 are worth 2 points each. All other questions are worth 1 point each.

Ethics Case #1

Banks charge fees for “bounced” checks—that is, checks that exceed the balance in the account. Fees they charge are often around $30 each. It has been estimated that processing bounced checks costs a bank roughly $1.50 per check. Thus, the profit margin on bounced checks is very high. Recognizing this, some banks have started to process checks from largest to smallest.

By doing this, they maximize the number of checks that bounce if a customer overdraws an account. For example, NationsBank (now Bank of America) projected a $14 million increase in fee revenue as a result of processing largest checks first. In response to criticism, banks have responded that their customers prefer to have large checks processed first, because those tend to be the most important. At the other extreme, some banks will cover their customers' bounced checks, effectively extending them an interest-free loan while their account is overdrawn.

Question 1: Richard Coulsen had a balance of $1,500 in his checking account at First National Bank on a day when the bank received the following five checks for processing against his account. Check Number, Amount: 3150, $180; 1, $200; 2, $250; 3, $300; 4, $340. Assuming a $30 fee assessed by the bank for each bounced check, how much fee revenue would the bank generate if it processed checks (1) from largest to smallest, (2) from smallest to largest, and (3) in order of check number?

Question 2: Do you think that processing checks from largest to smallest is an ethical business practice? Why or why not?

Question 3: In addition to ethical issues, what other issues must a bank consider in deciding whether to process checks from largest to smallest?

Question 4: If you were managing a bank, what policy would you adopt on bounced checks? Why?

Ethics Case #2

As its year-end approaches, it appears that Ortiz Corporation's net income will increase 10% this year. The president of Ortiz Corporation, nervous that the stockholders might expect the company to sustain this 10% growth rate in future years, suggests that the controller increase the allowance for doubtful accounts to 4% of receivables in order to lower this year's net income. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate of growth for Ortiz Corporation in future years. The controller of Ortiz Corporation believes that the company's yearly allowance for doubtful accounts should be 2% of receivables.

Question 5: List three stakeholders (companies or people harmed or benefited) in this case?

Question 6: Does the president's request pose an ethical dilemma for the controller? Be specific in what dilemmas are present, if any.

Question 7: Should the controller be concerned with Ortiz Corporation's growth rate in estimating the allowance? Explain your answer.

Paper For Above instruction

The ethical dilemmas faced by banks in processing bounced checks and corporate managers in financial reporting exemplify conflicts between profitability, ethical standards, and stakeholder interests. Analyzing these cases reveals the importance of ethical business practices and sound financial policies that prioritize transparency and fairness.

Analysis of Ethical Issues in Check Processing

Banks operating in a competitive environment often seek ways to maximize revenue, sometimes at the expense of ethical considerations. Processing checks from largest to smallest, known as "largest checks first," increases the likelihood of checks bouncing, hence elevating fee revenue substantially. For instance, processing checks from largest to smallest can generate significant profit—up to tens of millions of dollars—by capitalizing on the high profit margin on bounced checks. However, such practices may be viewed as taking advantage of customers' overdrawn accounts, potentially resulting in financial harm, especially for vulnerable individuals who may lack the means to recover from large overdraft fees.

From an ethical standpoint, processing checks from largest to smallest raises questions about fairness and honesty. Customers might feel deceived or exploited if they are aware that banks are manipulating check order to maximize bounce fees. The ethical obligation of banks is to treat customers fairly and transparently, which suggests that a fairness-based processing order—such as in check number order—may better align with ethical standards. Nonetheless, some argue that customer preferences, like processing large checks first, could justify the practice if customers are adequately informed, emphasizing transparency over specific processing order.

Other Issues in Check Processing

Besides ethical concerns, banks must consider operational efficiency, customer satisfaction, regulatory compliance, and risk management when determining check processing order. Processing checks from largest to smallest may boost short-term revenue but can damage customer trust if perceived as manipulative. Regulatory bodies scrutinize unfair or deceptive practices, and legal risks may arise if banks are perceived as exploiting customers. Additionally, managerial decisions should account for potential reputational damage and long-term customer relationships, which may be more valuable than immediate gains.

Policy Recommendations in Managing Bounced Checks

If managing a bank, adopting a transparent and fair policy is essential. One possibility is processing checks in the order received, which is the most neutral and transparent method, fostering customer trust. Alternatively, banks could inform customers of their check processing procedures and the fees involved, empowering clients with information to make informed banking decisions. Policies that ensure fairness, disclose processing methods, and avoid manipulative practices align with ethical business standards and promote long-term customer loyalty.

Financial Reporting and Ethical Dilemmas

The second case involving Ortiz Corporation highlights conflicts between short-term financial reporting strategies and long-term ethical standards. The president's desire to manipulate net income by increasing the allowance for doubtful accounts to artificially lower net income raises ethical concerns about honesty and transparency. Intentionally inflating doubtful account allowances can distort financial statements, mislead investors, and violate accounting principles such as prudence and fair presentation. The controller faces an ethical dilemma—balance between adhering to accounting standards and satisfying management's short-term objectives versus maintaining integrity and accurate reporting.

The stakeholders affected include shareholders, who may receive misleading information; employees, whose job security may depend on accurate financials; and regulators and auditors, tasked with ensuring compliance with accounting standards. Stakeholders harmed by such manipulation might include investors acting on distorted financial data, potentially leading to misguided investment decisions. Benefits could accrue to management seeking to present a subdued profitability to achieve certain strategic outcomes.

Implications of Growth Rate Concerns on Allowance Estimates

The controller should consider the company's actual financial health, receivables aging, and historical write-off rates rather than focusing solely on growth rate projections. While growth expectations influence estimates, overreliance on growth trends can lead to biased assumptions. An ethical and accurate approach involves using objective data and adhering to Generally Accepted Accounting Principles (GAAP) to estimate doubtful accounts. Transparency and consistency in these estimates ensure reliable financial reporting, fostering stakeholder trust and upholding managerial integrity.

Conclusion

Both cases underscore the importance of ethical decision-making in financial and operational practices. Banks and corporations must balance profitability and stakeholder interests with honesty and fairness. Implementing transparent policies and adhering to ethical standards not only complies with legal regulations but also sustains long-term trust and integrity in financial operations.

References

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• American Institute of CPAs (AICPA). (2018). Code of Professional Conduct. Retrieved from https://www.aicpa.org/research/standards/codeofconduct.html
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