Many facets exist when considering legal and ethical issues in financial reporting. Accounting industry professionals consider standard practices of accounting, and board of accountancy rules when creating ethics standards. Important, they also consider state, and federal laws. Ethics and the law work hand-in-hand, and therefore should be at the forefront of the minds of those pondering the commission of fraud as exhibited in the Excello Telecommunications case (hereinafter referred to as Excello).In this case, the Chief Financial Officer (CFO) considered inappropriately posting a $2. 1 million transaction to boost year-end earnings.
Possible Legal Issues Faced by Excello At the end of 2010, Excello faced the possibility of not meeting earnings estimates, which affects bonuses, stock options, and shareholders’ earnings (Mintz & Morris, 2011). Terry Reed, the Chief Financial Officer (CFO) of Excello contemplates recording a $1. million sale at the end of 2010 instead of in January 11, 2011. The issue at hand is that according to Generally Accepted Accounting Principles (GAAP) Excello must record this sale according the revenue recognition principle.
If recorded according to GAAP, the accounting department records the $2. 1 million sale to the accounts receivable account until the product ships, at which time the transaction records to the earned revenue account. If Reed records the $1. million sale in 2010 instead of 2011, he deceives the internal and external users of the financial reports by artificially inflating the end of year reports for 2010. This is an ethical breach as well as an impropriety against GAAP standards.
If Excello inflates earned revenue for 2010, they risk defrauding shareholders according to the Securities and Exchange Commission (SEC). Intentionally reflecting inaccurate information in the financial statements not only breaks state and federal law but also breaches the codes within the Sarbanes-Oxley Act of 2002 (SOX).