You lightly knock on her door and she tells you to come in and to shut the door.

Question

You lightly knock on her door and she tells you to come in and to shut the door. You are barely sitting when she tells you that you need to increase the POHR by 10% so that more manufacturing cost is applied to product cost. When you ask if you should do a recalculation of the POHR according to the Company policy she quickly snaps back “I just told you what to do; do not quote Company policy to me!” Additionally she tells you to do a journal entry to reclassify $250,000 of marketing and selling expenses as manufacturing overhead so that the cost is absorbed into the product cost rather than being recording as a period expense on the Income Statement. She tells you that “you need to do this” because the Company will show a loss and that will upset the shareholders. She also tells you that this matter must remain strictly confidential and not to say anything to anyone.
You ask her about the project that you submitted to her on Tuesday at 11:57 pm and she sharply replies, “I don’t care about that right now, this issue is more important, so get to it.”
You get up to leave and on the way back to your desk you start thinking about the directive you just received.
You think to yourself… No one is stealing money from the Company, you are only “reclassifying some period cost as product cost” and the “POHR is only an estimate any way”.
1.   So what is the accounting impact of doing what your boss Sally told you to do?
a.   For reclassifying the $250,000 of period cost to product cost.
b.   Changing the POHR to a higher rate without doing any recalculation
Be specific and complete in terms how doing these two things would affect the financial statements.

2.   Prepare a narrative on the following prompts (be sure to respond to all 4 of the prompts):
a.   Explain what you would do in this situation.
b.   Explain how you would go about handling this situation.
c.   How would you deal with the fact that the directive came from your immediate boss?
d.   Who (if anybody) would you go to help you resolve this matter?

3.   Would you do anything differently from what you stated in Items # 2 IF … you found out that, if the Company had a net loss, to keep the Shareholders “happy”, the CEO would lay off 20% of the company employees and you may be one of the those laid off.
Prepare your reply to each of the 3 items noted above. Write 4 sentences for each statement (one paragraph). Your responses are to be in good form including proper grammar, punctuation and spelling.

Item # 1: The Accounting Impact
(Enter your narrative here)
  

Item # 2: The Prompts for the Ethical Dilemma
(Enter your narrative here)

Item # 3: What Would I do?
(Enter your narrative here)

Explanation / Answer

1, A) reclassifying the $250,000 of period cost to product cost would show the other operating expenses of the company deflated and the production cost would be inflated, which means the operational cost of the company would be less.

1, B)Changing the POHR without any calculations, would show a rise in the overhead cost of the production, if not calculated, the difference between the actual and predetermined ( also known as the disposition of over) would be more and would lead to suspicion in the audit.

2, A) Although the given situation is just the estimation, it is ethically wrong to do so by the Accounting standards, hence I would refrain from doing so.

2, B) I would not do the said act and would involve concern authorities via written mail to all keeping my immediate boss in CC.

2, C) I would try to speak to her again and clarify and explain to her that it is ethically wrong to do so and you would refrain to do the same.

2, D) I would go the HR director and Finance Director as they would be the right person to involve in the matter, as the financials would be signed by the Financial Director and the Policy are implemented by HR dept, they are the right person to involve in this matter.

3) I won't do anything differently even after listening to the said statement of laying me off, I would stick to my ethical principles, if my name is spoilt in the later findings it would be difficult for me to sustain in the market, rather if I am laid off I would be able to find the job as I would be terminated for cost-cutting rather than for fraud.

Item #1 The Accounting Impact

If the POHR is inflated no one would be stealing money from the company. But it would be ethically wrong to do so, this would keep the shareholders on the wrong notion. Plus it would show that the company has fewer period expenses and the production cost is high. This is bound to hamper the financial statements of the company, just to keep shareholders happy in the wrong notion.

Item #2 The prompts for Ethical Dilemma

Keeping anyone in the wrong notion is wrong, moreover asking someone to do the wrong thing is more wrong. Here when the immediate boss asks to do the wrong act, which is wrong acc to the standards, which might have a minimal impact and keep shareholders happy is ethically wrong. It keeps investor in dark, plus it questions the credibility of the person who has asked and the person who is about to perform the task.

Item #3

I would straight away deny the request for such action. I would try to reason with my boss and explain to her that this is ethically wrong and even she should refrain from doing it. I would explain the future consequences to her and how the could impact both of us. If I am asked to do it repetitively, i would involve the higher authorities in it and if required i would terminate my services with the company.

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