Companies Often Try To Manage Earnings By Recognizing Revenu

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Companies often try to manage earnings by recognizing revenue before it is actually earned according to GAAP, or by deferring expenses that have been incurred. For example, to meet the targeted earnings for a specific period. A company may capitalize a cost that should be expensed. Read the following scenario and then decide how you would handle this opportunity to manage earnings. You are a division manager of a large public company.

Your bonus is calculated on your division’s net income targets that you must meet. This year that target is $1.5 million. You are authorized to sign off on any decision made within your division. You are faced with the following situation: On November 15, your division of the company ordered $150,000 worth of supplies in anticipation for the seasonal rush. Most of these supplies will be used by year-end.

These supplies were delivered on November 30. If you record this expense this year, your net income will be $1.45 million and you will not meet the target, and therefore not receive your bonus of $25,000 that you have worked hard for all year. What would you do and why? (1 to 2 paragraphs) Suggestions for Responding to Peer Posts Compare and contrast your peer’s response to your own. Were there any similarities or differences? Were the reasons your peer gave for his or her decision ethical and professional?

Paper For Above instruction

In this scenario, the division manager faces an ethical dilemma that pits personal financial gain against professional integrity and adherence to Generally Accepted Accounting Principles (GAAP). The decision to defer recognizing the supplies expense until the next fiscal year, in order to meet the bonus target, constitutes earnings management and potential manipulation of financial statements. While such tactics might seem beneficial in the short term, they pose significant ethical risks and undermine the credibility of financial reporting.

From an ethical perspective, managers are expected to uphold integrity, transparency, and compliance with accounting standards. Recognizing expenses in accordance with GAAP requires that costs be recorded in the period in which they are incurred, regardless of the impact on bonus compensation. Deferring the expense until after the fiscal year-end artificially inflates net income, potentially misleading stakeholders about the company’s actual financial performance. Such actions violate professional ethics set forth by organizations like the American Institute of Certified Public Accountants (AICPA) and the International Ethics Standards Board for Accountants (IESBA). Furthermore, attempting to manipulate earnings can have legal consequences, especially if it involves fraudulent financial reporting, as outlined under securities regulations such as the Sarbanes-Oxley Act.

Conversely, from a managerial standpoint, the decision to record the expense promptly aligns with best practices for transparency and accuracy in financial reporting. Honoring the timing of expense recognition not only ensures compliance but also maintains investor trust and managerial accountability. Although the temptation to manipulate earnings for personal gain, such as a bonus, might be strong, it is ethically and professionally preferable to accept the impact on bonus earnings in favor of maintaining integrity. Implementing transparent accounting practices fosters a culture of ethical responsibility, which ultimately benefits the organization and its stakeholders in the long run.

In conclusion, the ethical choice is to recognize the supplies expense in the current period, despite the personal financial implications. Upholding accounting standards and ethical principles outweigh short-term gains obtained through earnings management. Ethical leadership and integrity should always take precedence over manipulative tactics, as they preserve the credibility of financial reporting and foster trust among investors, regulators, and other stakeholders.

References

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• Sarbanes-Oxley Act of 2002, Pub.L. 107–204, 116 Stat. 745. (2002). U.S. Congress.
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