* BYP 1-7 Ethics Case Paper

* University of Phoenix

This case’s purpose is fully to examine how Ethics plays a vital role in the decision-making process within the given scenario. First of all, the stakeholders in this situation need to be defined before examining the issues. Next, the examination of the ethical issues involved within the context of the given scenario needs to be looked at. Finally, an analysis of what ethical actions I would have taken if I was Wayne Terrago under the circumstances given in this scenario will be explored. To begin with, the stakeholders in this situation need to be defined before examining the issues. After careful assessment of the situation, I will lay out a step by step reasoning behind who I believe are the main stakeholders in this ethical dilemma. The most obvious stakeholders in this given situation are the President of Robbins Industries, the Vice President of Finance of Robbins Industries, and Mr. Wayne Terrago, the Controller of Robbins Industries because they are the individuals responsible for making the decisions in this situation and are the main decision makers responsible for financial and accounting decisions at Robbins Industries. The shareholders and the employees of Robbins Industries will be the stakeholders who will be most affected by the decision that will be made by the three decision makers because in most cases of accounting fraud by a company, the losers in the situation more often than not are the shareholders and the employees of that company, and in this case, the employees and shareholders of Robbins Industries. The investment bank who will be involved in the planned bond offering would be an interested stakeholder because the accounting treatment of the advertising cost could possibly affect certain covenants required to meet the obligations prior to the bond offering taking place. Another interested party would be the financial community because the brokers, dealers, market makers, analysts, institutional investors, media, rating agencies, mutual fund companies, and other financial community stakeholders rely heavily on transparent financial information which is not altered or adulterated for the purpose of showing a company in better light than it is in to make decisions regarding that company. The next to last interested stakeholder in this given situation with Robbins Industries would be the existing lien holders because the misappropriation of advertising costs form an expense to an asset can affect financial ratios that lien holders rely on to decide whether a company is meeting the covenants of the bond indentiture. A final party who would be an interested stakeholder would be the local community in which Robbins Industries headquarters and plants are located because the economical impact on a local community of a plant shutdown and loss of jobs can be devastating.

By understanding who the stakeholders are involved in the given situation at Robbins Industries, a thorough examination of the ethical issues involved within the context of the given scenario needs to be looked at. In the situation in this case of Robbins Industries, the ethical dilemma is whether to expense the advertising cost as a period cost as Mr. Wayne Terrago, the Controller wants to apply the advertising costs, or to capitalize the advertising costs as an asset as Inventory as suggested by the President and Vice President of Finance of Robbins Industries, or to capitalize the advertising costs as prepaid expenses by others at Robbins Industries. After careful assessment of the situation, I shall now lay out a step by step reasoning behind what are the main ethical issues prevalent in this case.
First of all, if Robbins Industries due to their current financial difficulties decided to capitalize the advertising costs as Inventory as suggested by the President and Vice President of Finance of Robbins Industries, the company would be committing accounting fraud by misstating their income statement and balance sheet. In this situation, Robbins Industries will allow their current financial distress to break their fiduciary responsibilities to the shareholders and the employees of the company by being concerned with the short-term consequences of securing the bond offering, rather than the long term consequences that will be felt if the company is caught doctoring their books. The far worst consequence of making this decision possibly could be that the company may be in violation of the covenants of their bond indentitures after having to restate their financial statements meaning that the lien holders may call their bonds because Robbins Industries will be in default. If this action is taken, this will then affect all the stakeholders in a negative way if the company is caught and could cause the company to go into bankruptcy because of the almost certain negative sentiment that will prevail from the investors, the financial community, and the regulators. Next, if Robbins Industries advertising costs were to span beyond one year, then it would be appropriate for the company to capitalize the part of the expense that would benefit the company in the next fiscal year as a prepaid expense. In this situation, the advertising costs do not seem to be of this sort, so it is not necessary to classify any of the advertising costs as prepaid expenses. However, if Robbins Industries did decide to classify the advertising costs as prepaid expenses, then the company is understating their expenses, overstating net income, overstating shareholders equity, and misrepresenting the true picture of the company as a whole. I want to reiterate again that if this action is taken, this will then affect all the stakeholders in a negative way if the company is caught and could cause the company to go into bankruptcy because of the almost certain negative sentiment that will prevail from the investors, the financial community, and the regulators. Subsequently, I want to explore ancillary ethical issues related to the above two accounting treatments being considered by Robbins Industries. First of all, the financial reporting requirements are dictated by Generally Accepted Accounting Principles in which both of the above decisions would not meet those requirements, and as result, would have negative affects on the company. Secondly, the company officers are failing in their fiduciary responsibility to shareholders by destroying value by committing unlawful actions because any time in an event or wrongdoing, the company’s market value is more than likely to get hurt. Thirdly, the two decisions will negatively impact the company’s credit rating and will impact the company’s image which will further deteriorate the company’s standing in the financial community, with the public, with its shareholders, and with all of its other stakeholders. Finally, in my opinion, the best course of action is the treatment that Mr. Wayne Terrago, the Controller of Robbins Industries is recommending because advertising cost is best treated as a period cost. Mr. Wayne Terrago’s recommendation follows Generally Accepted Accounting Principles and would not cause any ethical problems at the company. His actions to treat advertising costs as such may not alleviate the financial problems at the company, but would alleviate any penalties form regulators and legal problems with regulators, shareholders, and lien holders as well as massive financial distress from the after effects of the wrong doing.

In conclusion, an analysis of what ethical actions I would have taken if I was Wayne Terrago under the circumstances given in this scenario will be explored. If I was Wayne Terrago, my actions would be consistent of doing the right thing which is to expense the advertising costs as a period cost and let the chips fall where they may lie. I would under no circumstances ever deter from using Generally Accepted Accounting Principles even in the case of being threatened to be fired, and as a CPA candidate, it would be my fiduciary obligation to report to the Securities and Exchange Commission any such actions of wrong doing. The set of ethical standards that I believe everyone should follow is the ethical standard as prescribed to by the CFA Institute. The most important reason why I chose to become a CFA candidate is the very fact that ethics is the utmost important criteria necessary for a candidate to demonstrate to achieve charter status as well as maintain the charter. The CFA Institute declares that,” The CFA Institute Code of Ethics and Standards of Professional Conduct (Code and Standards) are fundamental to the values of CFA Institute and essential to achieving its mission to lead the investment profession globally by setting high standards of education, integrity, and professional excellence. High ethical standards are critical to maintaining the public's trust in financial markets and in the investment profession. Since their creation in the 1960s, the Code and Standards have promoted the integrity of CFA Institute members and served as a model for measuring the ethics of investment professionals globally, regardless of job function, cultural differences, or local laws and regulations.” I live my life by these codes and ethics in everything I do irregardless of what reason it is for and why, and I firmly feel that if everyone did so, this world would be a better place.

REFERENCES *
CFA Institute. (2005, June). Abstract of the CFA Institute Code of Ethics and
Standards of Professional Conduct. Retrieved January, 19, 2009 from
http://www.cfapubs.org/doi/abs/10.2469/ccb.v2005.n8.4568.