Module 4: Bonnie Morgen Case Study:
To help accountants navigate the complex and unsystematic accounting principles within GAAP the Securities and Exchange Commission designated the Financial Accounting Standards Board (FASB) as the organization responsible for establishing accounting and financial reporting standards within the United States (Kenton, 2019). FASB created ASC 606 also known as the new revenue recognition standard that virtually affects all businesses that enter in contracts with customers that involve the transfer of goods or services.
While it might seem simple that revenue should be recorded when an item is sold, in accounting recording such transactions can be much more complex. Under the revenue recognition principle, revenues are recognized in the period that they are realized and earned. In other words, revenue can only be recorded when the goods are received, and the services are performed not necessarily when cash is received. Also, the inflow of a future economic benefit needs to probable and the amount coming in needs to be able to be measured reliably. However, within the revenue recognition principle, there are many gray areas involving timing that exist because the economic event is typically being recorded before a financial event takes place which is why one of the most common techniques used by companies that are seeking to artificially boost their income is to manipulate their revenues. Studies conducted by Deloitte show that 41% of fraud cases can be attributed to the manipulation of revenue (Tuovila, 2019). Overall the criteria’s outline under the revenue recognition can be interpreted differently by different parties and depends on an individual’s integrity.
The case study “Bonnie Morgen: First Day on the Job and Facing an Ethical Dilemma” addresses a situation where Bonnie Morgen must decide a course of action when she discovers her company had been misrepresenting orders as sales to meet their stated sales budget thus overstating their revenues by nearly one and a half million dollars. The orders that were being recorded as sales where still months away from being completed and would not ship until the following year however upper management and Jerry the former controller argued that an order was as good as a sale as it would eventually be manufactured and shipped which addresses the timing uses within the revenue recognition principle. All of this was done due to the fact that if the budget was not met both a large number of bonuses and future promotions would be a risk. On top of violating the revenue recognition principle, it was discovered that management has instilled fear into their employees which could have potentially caused them to perform unethical actions. Earlier in the year, Jeff had pressured Tammy one of his employees to hold back on some bills that needed to be accrued and when she refused, she was written up for insubordination causing her to leave the company.
As stated, earlier accrual accounting cannot be seen in black and white as many grey areas exist within the revenue recognition principle. First and foremost, it is important to note that accounting principles in general typically leave room for interpretation which is why creative accounting plays such a big role in financial reporting. Creative accounting involves the use of unorthodox techniques that help manipulate an organization’s profit levels thus making their financials appears more favorable. While not illegal creative accounting practices simply interpret regulations in a different manner, but it can be argued that it is an unethical practice as it does not meet the main objectives of financial reporting. Research shows that the most commonly used method of creative accounting was the overestimation of revenues through the recognition of fictitious revenues from product sales (Remenarić & Kenfelja, 2019). However, after further analysis the fraudulent acts that where being committed by Jeff seem to be outside of the scope of creative accounting as orders can only be manipulated depending on whether the organization is using FOB shipping or FOB destination methods but Jerry would record revenue way before any of this events occurred.
To prevent both creative accounting practices and fraudulent acts it important for companies to have someone with a strong accounting background and audit experience. Before obtaining an accounting, role Jerry’s experience included 10 years of working as an entrepreneur and he prided himself on not having previous accounting experience which is where one of the main issues within the organization arises from. A controller is typically responsible for all accounting related activities that usually report directly to the chief financial officer so having a competent controller is crucial. More often than not companies require a controller to have a minimum of 10 years of direct accounting experience while holding a CPA license. It’s possible that the budgets were not being met due to Jerry’s inexperience and lack of knowledge on certain accounting topics. If Jerry was to make a utilitarianism moral approach to the situation, he could have rationalized his action by arguing that they were being done for the organization’s best interest and that the bonuses would help out individuals within the organization. Nonetheless, the overemphasis on short-term monetary gains may lead to decisions and rationalizations that could potentially harm an individual’s reputation but also threaten the very existence of an entire organization.
When fraudulent activates occur one of the main things that need to be looked at is the company culture to see what kind of value an organization places on its moral and ethical principles. Strong moral behavior always starts with management as they are the ones setting the tone. If management doesn’t have strong moral beliefs employees will mimic their behavior leading to questionable behavior. In the case study in review managements behavior appears to be an issue as they make questionable decisions while encouraging their employees to act in an unethical manner. Bill Ridgefield the division manager had previously made comments stating that they should not record depreciation for the month because by doing that they would be able to meet their initial budget. It was stated that those particular comments were meant as a joke however leaders need to realize that they are held to higher standards than everyone else therefor they must be extra vigilant about their intentions because employees will interpret their behavior and act accordingly. More often than not individuals commit unethical actions based on the idea that the organization will reward actions that violate ethical standards.
Often fear can also play a role in an employee’s behavior and as stated earlier management had created a fear-based culture within their organization. Bill Ridgefield the division manager was interpreted as intimidating and demanding, and it was even stated that this could have played a role in Jerry’s behavior. Often, the fear of making mistakes or not meeting certain goals/criteria’s prevents an individual from acting in accordance with their values and as a result, they fail to make ethical decisions because they fear the consequences that may come if they to fail to carry out the wishes of management which could potentially be the case for Bonnie if Bill manages to intimidate her. Due to a fear-based future speaking up against the unethical behavior can be a difficult task however Bonnie is in a unique situation in view of the fact that she has already established a relationship with the CFO Ed Judsen as she worked directly with for an extended period of time. It is unclear whether or not Ed was aware of the unethical acts that where being committed within the organization but the previous relationship between him and Bonnie allows Bonnie to speak with someone that holds a position that can encourage change.
In accounting, a deontological approach to moral decision making will always lead to better decisions when being compared to a utilitarianism approach. Accounting is very rule and principle focused and if an individual stray’s away from those rules more often than not their actions will seem unethical by outside parties looking in. If bonnie wants to fix the ethical issues within her organization, she is going to need to make sure that her financials follow GAAP rather than focusing the incentives that come with meeting the budgets and numbers required by management.
Reference:
Kenton, W. (2019, November 18). Financial Accounting Standards Board (FASB). Retrieved
from https://www.investopedia.com/terms/f/fasb.asp.
Remenarić, B., & Kenfelja, I. (2019, January). Creative accounting – Motives, techniques and
possibilities of prevention. Retrieved December 7, 2019, from https://www.researchgate.net/publication/330202220_Creative_accounting_-_Motives_techniques_and_possibilities_of_prevention.
Tuovila, A. (2019, November 20). Revenue Recognition Definition. Retrieved from
https://www.investopedia.com/terms/r/revenuerecognition.asp.