1. Many accrued liabilities are estimates of future expenses based on management’s business expertise and projection of potential obligations. Such estimates are recorded in reserves (sometimes referred to as “cookie jar” reserves, which are adjusted at financial statement dates to reflect current estimates). In practice, many accountants use reserve adjustments to smooth earnings to eliminate or reduce volatility that may negatively impact share prices. Since management’s obligation to shareholders is to increase shareholder wealth, is the adjustment of reserves to smooth earnings an ethical violation? You should use one of the ethical decision models in the 2006 article by Cargill “Drawing the Line between Ethical and Marginal Practice.”
…show more content…
Financial statements users use this financial information to make decisions regarding the allocation of resources. Therefore, the financial information stated in financial statements and in any other reports must be accurate, faithful and relevant. In my opinion, the adjustment of reserves to smooth earnings is an ethical violation. According to the FASB, financial professionals and accountants must abide by ethical standards. There are three major aspects: competence, objective and confidentiality. All financial professionals and accountants should apply those standards to regulate what kind of business they conduct, and how they use their skills. The Association for Accountants and Financial Professionals in Business also emphasize that accountants must be objective and avoid conflicts of interest. Based on above information, many accountants use reserve adjustments to smooth earnings to eliminate or reduce volatility that may negatively impact share prices. Those accountants violate the principle of objective to meet their needs. They provide the untrue financial statements to financial statement …show more content…
What are the probable responses from the SEC, AICPA, and the State Board of Public Accountancy if this decision leads to a violation of the Rules of Professional conduct?
The accountants may think the possibility of the adjustment being discovered by SEC, AICPA and the State Board of Public Accountancy is very low. The accountants may think the adjustment is a not big deal because they just use the adjustment smooth earnings and they do not fabricate the numbers. They may also think the adjustment is temporary, and they will adjust back in the future. Therefore, SEC, AICPA and the State Board of Public Accountancy may can not find out the adjustments. Even if SEC find some adjustment, accountants can use their sufficient reason to explain the adjustment.
b. What are the probable action of investors, creditors and regulators if this action produces misleading financial statements?
The accountants may think investors, creditors and other financial statement users will make same decisions when use modified financial statements. The adjustment is just making numbers looks better and keeping the firm’s high share price.
2. Recent pronouncements of the FASB indicate that the FASB is moving away from historical cost accounting toward the use of current, or fair,
Financial statements users use this financial information to make decisions regarding the allocation of resources. Therefore, the financial information stated in financial statements and in any other reports must be accurate, faithful and relevant. In my opinion, the adjustment of reserves to smooth earnings is an ethical violation. According to the FASB, financial professionals and accountants must abide by ethical standards. There are three major aspects: competence, objective and confidentiality. All financial professionals and accountants should apply those standards to regulate what kind of business they conduct, and how they use their skills. The Association for Accountants and Financial Professionals in Business also emphasize that accountants must be objective and avoid conflicts of interest. Based on above information, many accountants use reserve adjustments to smooth earnings to eliminate or reduce volatility that may negatively impact share prices. Those accountants violate the principle of objective to meet their needs. They provide the untrue financial statements to financial statement …show more content…
What are the probable responses from the SEC, AICPA, and the State Board of Public Accountancy if this decision leads to a violation of the Rules of Professional conduct?
The accountants may think the possibility of the adjustment being discovered by SEC, AICPA and the State Board of Public Accountancy is very low. The accountants may think the adjustment is a not big deal because they just use the adjustment smooth earnings and they do not fabricate the numbers. They may also think the adjustment is temporary, and they will adjust back in the future. Therefore, SEC, AICPA and the State Board of Public Accountancy may can not find out the adjustments. Even if SEC find some adjustment, accountants can use their sufficient reason to explain the adjustment.
b. What are the probable action of investors, creditors and regulators if this action produces misleading financial statements?
The accountants may think investors, creditors and other financial statement users will make same decisions when use modified financial statements. The adjustment is just making numbers looks better and keeping the firm’s high share price.
2. Recent pronouncements of the FASB indicate that the FASB is moving away from historical cost accounting toward the use of current, or fair,