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The treatment of revenue in accounting processes within organizations is one that raises gray areas as well as apparent cut ethical and legal issues (Mintz & Morris, 2011). The requirement for the reliability of the accounting information presented is one that is increasingly becoming important, and this fact has been underscored by the introduction of various rules and regulations, including the Sarbanes-Oxley Act. The main crux of the Act is to ensure that any revenue reported is one that is accurate and represents the company’s actual position (SEC, 2003).
Revenue recognition forms the ethical and legal issues to be analyzed in the present scenario involving United Thermostatic Controls Company. Revenue recognition is pegged upon the requirement that revenue can and should only be recognized if it has been received, or it can be realized and earned at the time of recognition (Thornton, 2011).
Pertinent to the present case is the illegal and unethical practice of revenue recognition that is improperly timed. There are various categories of fraudulent and dishonest revenue recognition accounting that are often utilized in going around the proper revenue recognition requirements.
The issue that raises both legal and ethical concerns is the misuse of the “bill, and hold” kind of sale that is utilized by United Thermostatic controls Company in its sales operations. The basic premise of the use of bill and hold transactions in improperly recognizing revenue is that the selling entity knows as a sale a deal even where the customer has yet to take ownership or bona fide title of the product, and neither assumes the risk nor rewards accruing from the acceptance of claim in the goods (SEC, 2003).
In this particular scenario, it is evident that this is what is happening. The utilization of this specific method in recognition of revenue is, however, not entirely unethical and illegal. If particular criteria are met, then the revenue recognition would be held as valid and legal. The requirements will be discussed step by step in both scenarios presented in the present case.
Shipment to Allen Corporation
The reporting of the above transaction as a part of revenue for the quarter ending December 2010 was an erroneous recognition of revenue. This is based on the fact that for income to be considered in this scenario, three principles have to be met.
The first principle is that at the time of the recognition of revenue, the seller must have assumed the risks and rewards about ownership and control of the product (SEC, 2003). In the present case, the agreement indicates that control of the shipped product would only be taken by Allen Corporation on the agreed date, on the 1st of February 2011. Therefore, at the time of the shipment, there was no conceivable way that the customer would have assumed the risk and reward of ownership.
The second principle is to the effect that such recognition of revenue only becomes valid if the terms of the sale have been met (SEC, 2003). In this particular scenario, all the terms of the agreement have been met except for the date of shipment. Therefore, this negates such a principle.
The final principle that would allow for the valid recognition of revenue in this scenario is that for the income to be legitimately recognized, it must be realized or able to be understood and earned (Brink, 2011). In the above scenario, the revenue is yet to be achieved. Further, it cannot be realized and received in the future as the customer can reject the goods as not being supplied by the agreement.
About Bilco Corporation, the first principle is negated because of the early delivery of goods. Hence, the customer is not obligated to take possession and ownership of the goods. The second principle, as outlined above, is also not met in this scenario. The reason for this is the fact that the agreement expressly stated that the goods would only be accepted if supplied in full. The consignment in question was only half. Revenue, in this case, arising from the facts could therefore neither be realized nor realizable and earned.
The wrongful recognition of revenue in the two transactions above in line with the Sarbanes-Oxley criteria together to inflate the sales figures for the accounting period with a view of influencing a public offering was therefore highly illegal.
Various ethical issues arise from the above scenarios. In indicating the transactions as a revenue-generating for that particular quarter, the action by Campbell went against two specific ethics tenets about accounting. These principles are those of objectivity and integrity (IFAC, 2006). This particular principle is to the effect that accounting reporting should be objective and indicate the right position and not a subjective view. The company was advancing a picture of their own to entice prospective shareholders (Brink, 2011). Integrity requires honesty and truthfulness; these are the factors which were lacking in the company’s actions. These actions were misleading to both internal and external shareholders as the revenue reported did not present the exact position of the company, and it was misleading (Bhatia, 2004).
The appropriate step to be taken in this regard, in my view, is first to correct the inaccurate revenue recognition to reflect the right position of the company about reported accounting information. This revision should be made public. Further, as a long term measure, there should be instituted stringent internal compliance policies about the Sarbanes-Oxley Act to ensure that there is no leeway in the future for such action (IFAC, 2006).
Bhatia, S.(2004). Business Ethics and Corporate Governance. New Delhi: Deep & Deep Publishing. Web.
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Brink, A. (2011). Corporate Governance and Business Ethics. New York, NY: Springer publishers. Web.
International Federation of Accountants (IFAC). (2006). Code of Ethics for Professional Accountants. Web.
Mintz, S. M., & Morris, R. E. (2011). Ethical Obligations and Decision Making in Accounting (2nd ed). New York, NY: McGraw-Hill/Irwin. Web.
Securities Regulation Committee (SEC). (2003). Report Persuant to Section 704 of the Sarbanes-Oxley Act of 2002. Web.
Thornton, G. (2011). Principles Based Revenue Recognition: Executory Contracts and the Asset Liability Approach. Web.