Notes payable are integral parts of a company’s accounting as they serve as general ledger account presenting the issued promissory records. The violation of the proper procedures with notes payable may lead to unethical behavior and adversely affect the stakeholders. In this regard, this paper focuses on the reclassification of notes payable in the context of ethics and identifies options that were possible to follow.
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The key topic of the given case study is unethical accounting practices with the aim of meeting the employer’s expectations. Among the key stakeholders, one may note Kurt Nolte, the controller, and Hans Pfizer, the president of Pendleton Automotive Corporation. At the same time, ten stockholders act as indirect stakeholders, who want to receive their annual dividends. There are two facts of unethical accounting, each of which needs to be analyzed to properly understand the situation.
First, the behavior of the president seems to provoke the controller to come up with an unethical decision of reclassifying note payable. From reviewing the given case study, it becomes evident that the president pressured his employee to adjust the financial statement regarding cash flows and make $60,000 payable activity.
This is a violation in the treatment of notes payable that is prescribed by the Generally Accepted Accounting Principles (GAAP) that are used to present the official reporting necessary for an accurate description of the financial condition of an organization (Kimmel, Weygandt, & Kieso, 2015). In addition, the mentioned principles require ensuring validity of the information provided in the documents. Thus, the unethical behavior of the president was caused by the desire of acquiring the advantage from falsifying the financial statements.
Second, as for the controller, one should emphasize that his behavior was also unethical. Instead of seeking new opportunities to accomplish the required $1 million to make sure that the stockholders will receive their dividends, he participated in fraud. Namely, the controller violated the accrual principle proposed by the GAAP. This principle means that to account for a company’s operations, not only transactions related to money are recorded, but also barter, sales on credit, exchange of assets and liabilities, and other transactions (Kimmel et al., 2015). The controller’s actions led to the violation of transparency and integrity of the company’s accounting system.
The alternative to the given study is possible for both the president and the controller. They might refuse to adopt the unethical behavior and follow the regulations prescribed by the national guidelines. For example, the president might ask the controller to prepare the list of potential solutions, emphasizing that they should be ethical (Zadek, Evans, & Pruzan, 2013). In his turn, the controller might decide to seek an outside counsel or present this complicated situation to the attention of the board. Accordingly, the president might also consider that the collective discussion of the issue would lead to a more appropriate decision.
The critical analysis of this case study shows that none of the stakeholders want to discover the misclassification. The controller wants to meet the expectations of his employer even by means of unethical solutions, and the president strives to satisfy the stockholders’ requirements regarding dividends. It seems that stockholders are not interested in accounting details of Pendleton Automotive Corporation unless they receive their shares. However, if the board members will observe $1,030,000 net cash flow, they might be willing to understand these numbers occurred. Thus, there are two ethical ways to address the discussed problem, including the open discussion with the board and search for an external counsel.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2015). Financial accounting: Tools for business decision making (8th ed.). Danvers, MA: John Wiley & Sons.
Zadek, S., Evans, R., & Pruzan, P. (2013). Building corporate accountability: Emerging practice in social and ethical accounting and auditing. London, UK: Routledge.