Unethical Accounting Behavior
Our hypothetical situation is a company that sells housing units in a resort community. We will call the company, Jones, Inc. Jones Inc. uses techniques to sell as many units as possible in a given fiscal period, financing almost all, regardless of whether the client is credit worthy or not. The sales force receives a bonus from the real estate conglomerate for selling a certain number of units, and operates on a strong of volume rather than actual cash flow. From an accounting standpoint, Jones' underestimating bad debt within certain fiscal periods as opposed to presenting appropriate quarterly reports allows the books to look far better than the actual cash flow of the organization. Clearly, utilizing proper accounting procedures, income/debt ratios should be reported during the specific quarter or time-period they occur, rather than "overstating" or "understating" within a fiscal period (See: Smith, et.al. 2003).
In addition, GAPP, or "generally accepted accounting principles," has very specific meanings for the accounting profession. These principles govern the licensing and standards of all accountants, and were designed to allow the ethnical believability of certified accounting documents throughout the industry (see, for example, www.fasab.gov/accepted.html). These guidelines are a standard, a framework for fiscal accounting reporting and responsibilities. It includes, but is not limited...
Clearly, Jones is not adhering to these standards, and therefore, the books for the company are suspect.
To bring the company into compliance, the following steps will be necessary:
1. Complete reorganization of the company's books, ensuring that income, debt, accounts receivable and payable, are documented and reported during the appropriate accounting period in which the accounting activity occurs.
2. A new, written, and audited procedure be put in place regarding the ability for Jones to grant credit on new mobile homes. Whatever that standard is, it must be set into a document which examines income, ability to repay, down payment, debt to income ratio, etc., and treated equally.
3. More robust collection actions should be put in place to allow A/R to become current and clear bad debts; even involving repossession or new financing and payment agreements.
4. Certified documents should be prepared by a licensed CPA at least quarterly, and then audited to the standards of the banks needed for loans, etc.
Utilizing these controls, as well as reexamining the ethical considerations and adhering to GAPP standards, could, within a few quarters, certainly a fiscal year, bring the company bank into standard and…
