ACC618 Case Study 1 Capitalization versus Expensing

Name

ACC618: Professional Ethics for the Accountant (FSJ2302A)

Traci West

16th January, 2023

Case Study: Capitalization versus Expensing

Assume both Hernandez and Harrison hold the CPA and CMA designations. What are the loyalty obligations of both parties in this case? If you capitalized the expense, you would overestimate your assets while simultaneously understating your expenses, which would result in an increase in your net income. This would result in financial statements that are both misleading and false. Because Hernandez and Harrison are Certified Public Accountants, they are expected to have devotion to the public interest. They have a duty of loyalty to the company since they work for a public corporation, and that duty requires them to generate financial statements that are honest, non­misleading, and in accordance with widely accepted accounting principles.

It is anticipated of Hernandez and Harrison that, in their capacity as CMAs, they will carry out their professional responsibilities in accordance with the pertinent laws, rules, and technical standards. These requirements include GAAP, which regulate the expense reporting for each item. Because of their obligations, they are required to not only adhere to the company’s policies but also to refrain from manipulating the financial figures (Mintz & Miller, 2023). They are obligated to conduct themselves in a manner that is beneficial to the company. Harrison may be attempting to improve the firm’s short­term financial condition, but this move may generate an issue for the firm’s reputation that will persist for a longer period of time.

Assume that you were in Gloria Hernandez’s position. What would motivate you to speak up and act or to stay silent? Would it make a difference if Harrison promised this was a one­time request? Gloria must muster the guts to point out the injustice of capitalizing $1 million that ought to be expensed. Instead of focusing on the short­term benefits of increased net income or a larger bonus, she should consider the long­term damage she would be doing to the company’s and her reputation. Gloria may face disciplinary action from a state board of accountancy if she were to capitalize the things and it turned out that the expensing was appropriate. Like Betty Vinson in the WorldCom case, she might be held responsible for going along with the crime and ultimately convicted.

Rather of deducting $1 million in expenses over 12 years, Gloria is being asked to write off the cost of a single, major purchase. The change in accounting approach will immediately increase net profits for the year, which in turn will increase executive incentives. Since her job security may be at issue and she does not like to offend her superior, it could be tempting to go along with the plan. However, according to the criteria of competence and credibility in the IMA Statement of

Ethical and Professional Practice and the provisions of objectivity and reasonable care in the AICPA Code, Gloria should expense the items.

Gloria needs to be ready to address the Chief Executive Officer and the Board of Director’s Audit Committee. She needs to let them know that the items have to be expensed because of the company’s and the industry’s accounting policies. If the expenses are capitalized to artificially inflate profits and bonuses, the credibility of the business is harmed, and the financial statements are misleading (D’Elia, 2019). Gloria may need to hunt for a new work at a company with a corporate culture more in line with her ideals, even if her current position survives her refusal to capitalize the items.

Even if Harrison assures Gloria that this is a one­time request only, Gloria should refuse to comply with the capitalization demand. Gloria puts herself in a position to be “got you’d” if

Harrison tries to manipulate accounting again in the future and she goes along with it. As Betty

Vinson could see, the once­off request soon evolved into a daily occurrence. To combat the disablers, or those who want Gloria to go along with the plan, Gloria should seek to identify enablers in the organization, such as a trusted advisor.

Assume that you were Gloria Hernandez’s position. What would you do and why? It was really cool how the majority of you responded that you would not comply with the request by saying that you would not. When one is sitting in an online classroom and is not experiencing the actual pressure, it is easy to state that one should not comply with such requests. However, I also want to note that it is easy to claim that one should not comply with such requests. Gloria must not only contemplate the possibility that she could lose her work, but also the possibility that she will face new hurdles in her efforts to pay her bills, student debts, mortgage payment, vehicle payment, and the myriad of other responsibilities that come along with being an adult in the real world. 

References

Mintz, S. M., & Miller, W. F. (2023). Ethical obligations and decision making in accounting: Text and cases (6th ed.). McGraw Hill Education

D’Elia, L. P. (2019). Effects of Business Ethics Education on Moral Reasoning Ability of Certified

Public Accounting Majors (Doctoral dissertation, Saint Leo University).