Rob Oostendorp
Ethics in Accounting
Professor Ritsma
5/14/02
#79 Edvid, Inc.
Analyzing Edvid’s situation with the 7-step ethical decision-making process:
Facts:
• Edvid wants to use the Modified Operating Method for accounting for its revenue. • Hutton wants to use Profit Recognition – New Method for accounting for Edvid’s revenue. • Edvid justifies their position with SFAS No. 48 & 53. • Hutton felt that neither SFAS No. 48 or 53 applied to Edvid’s position.

Operational Issues: • Edvid is showing its lack of integrity when it comes to pretending it’s in an industry, which it isn’t. • Edvid has given Hutton an ultimatum to either do the audit their way, or hit the highway. • The ultimatum reveals Edvid’s pre-decided position to shop around for auditors. • If Hutton complies, he would be in direct violation of the Public Interest Principal. • Hutton would also be in direct violation of being Independent.

Accounting Issues:

• The Revenue Principal: Matching revenue to when it’s earned. Respectively, Edvid wants to recognize revenue when it’s collected and not when it’s earned. • SFAS No. 48 “Revenue Recognition When Right of Return Exists” Edvid believes they fit the profile while Hutton believes they don’t • SFAS No. 53 Licence agreements for television programs – Hutton doesn’t believe that Edvid fits the profile of a television program since they make educational tutorials. • GAAP would be violated if Hutton approved Edvids plans to go ahead and file their financial statements using rule SFAS No. 48 or 53.

Stakeholders & Obligations:

Stakeholders have a right to know what’s going on here. If I were Hutton, I’d be particularly concerned with Shareholders rights. Shareholders rights can be violated when auditors stray away from GAAP and don’t follow the Revenue Principal.
Ethical Analysis:
If Hutton followed Edvid: • Would it be legal? No, it would be against GAAP. • Would it be consistent with professional standards: No, it’d be disregarding FSAB’s standards. • Is it right? No, it is neither consistent legally, or ethically with regard to professional standards. • Is it beneficial? No, the benefits of following the CFO’s plan would probably result in fewer benefits than it would result problems.

Course of action:

Do not agree to Edvid’s ultimatum. I would probably assume that Edvid would drop them as an auditor. I assume this because Edvid’s ultimatum makes me believe that they will be ‘shopping’ for auditors.

Double Check:

I personally would rather be known for doing the right thing. Imagine being Hutton and seeing his name in the paper saying, “Local account violates GAAP, shareholders sue.” I personally would rather have it say, “Local account integrity in tact, new professional standards set.”

Situational Analysis:
If Edvid went along with Hutton’s professional advice and filed under the Modified Operating Method, what would result? Edvid’s revenue would be significantly lower than they had projected. In the Modified Operating Method, which had been previously used, their revenue for the first year of subscriptions would have been $350. Under Edvid’s new proposed plan their CM for the first year would have been $434.

Rob Oostendorp
Ethics in Accounting
Professor Ritsma
5/14/02
#98 Edvid, Inc.
Don Zummer’s level of moral reasoning: • Stage 1: Avoidance of punishment – Don doesn’t want to go into the future with revenue short of expectations. He needs higher revenue to avoid punishment as Cubbies management. • Stage 2: Zummer definitely fits stage 2 since his feelings come before others (like stockholders).

Ernie Binks: • Stage 1: Binks exceeds stage 1 because he wants to avoid legal punishment seeing as he believes that agreeing to Cubbies arrangement would be illegal and against GAAP. • Stage 2: Binks is aware of others needs. He recognizes the need to keep Zummer happy so his company can keep him as a client. • Stage 3: Due to the fact that at the end of the case he hadn’t decided what to do, and he was considering conforming to his superiors advice, he would fall into deciding with group norms. • Stage 4: On the other hand, he was also thinking about going against the group norms and doing what would benefit society, which would put him into stage 4.

John Kessinger: • Stage 1: He wants to avoid the punishment of losing Cubbies as a client • Stage 2: Kessinger is aware of Binks proposal and its benefit to society as far as being ethical. But he’d rather keep Zummer as a client and so he suggests, “giving this one to the client”

If I were in Binks position, I would ask to go to a higher power for the interpretation of SFAS No. 28, 29, 51. For example I’d suggest to my superiors and Cubbies that I felt their interpretation was wrong and that someone like the SEC should really be asked what the correct interpretation for their position should be. If this idea were rejected, I would ask if there would be anything else we could do to find a good interpretation of SFAS No. 28, 29, 51.
Rob Oostendorp
Ethics in Accounting
Professor Ritsma
5/14/02
#111 Whistle Blowing and the Professional
I don’t think she should be paid 20.4 million dollars because it’s a issue of redundancy. What I mean is that she whistle blew because she was upset that people inside the state organization were embezzling money. Now, because they treated her poorly, she wants the state to pay her an outrageous amount of money. I don’t think it’s fair, in the public’s interest, for her to be receiving 20.4 million of the publics tax dollars. Although, I do think that it would be good, in the public’s interest, for the state to offer her the 3.5 million dollar settlement. My reasoning behind that is that she has come across large sums of debt and the state should at least cover that. However, her better judgment should tell her that she doesn’t need that 20.4 million settlement.
If I were Reznik, I would accept the offer. Ethically, she shouldn’t even accept the 20.4 million dollars because it’s a conflict with her whole reason behind whistle blowing. She whistle blew because it would save the taxpayers money or at least the money received by the state would be more accurately allocated. If she would accept the 20.4 million, then she would be adding to the taxpayer’s money being poorly allocated. If her ethics told her to whistle blow in the first place, then her ethics should be telling her to accept the 3.5 million to pay off her debt but not to bother with the 20.4 settlement, it’d be excessive.
Initially, I don’t really think it matters what profession you work in, a procedure should be set. If I see a problem that should be fixed, I should go to my superiors. If they don’t listen, I should go to their superiors. If they try to cover it up, go to regulators and whistle blow. I guess I believe it doesn’t depend what profession someone is in. I believe everyone should use rational in their decisions and try to solve the problem internally first. If all else fails, whistle blow.
Rob Oostendorp
Ethics in Accounting
Professor Ritsma
5/14/02
#114 Supreme Designs, Inc.
Kevin needs to ask himself, what is the right thing to do? Should he present the problem to her father? Is her father in on it? Should be present it to all three partners? The issue of concern is what are the consequences going to be for Kevin’s actions. If Kevin rats on his boss, will her father be so outraged that he gets fired? Gets promoted? Should he respect his boss’ privacy and realize that he shouldn’t open the letter in the first place?
The role that ethical standards in the accounting profession should play is huge. According to ethical standards Kevin has a responsibility to carry out his job in a moral manor. He must also avoid all conflicts of interest and advise all appropriate parties of any potential conflict. Gold mine! Kevin just found his reason to report the problem to his superiors. The Institutes of Management Accountants Standards of Ethical Conduct states that Kevin is obligated to report and advise all appropriate parties of potential internal conflicts of interest. Having someone running the books without any kind of control or check system is a conflict of interest. Kevin should advise the company to hire a auditor to run through the books and look for potential conflicts of interest as a control and check method. During their audit and review they would find the partner’s daughter’s withdrawals and report the problem to Kevin’s superiors. A perfect plan for Kevin to report the problem, without really reporting the problem.
Just to reiterate my point and explain exactly what I’d do, I’ll throw everything into first person…
I would explain to all three partners with a memo that it is absolutely necessary that there be a control process within the organization’s accounting department. I would suggest them to hire a third part accounting firm to act as our controller. We could minimize the costs by doing a quarterly internal accounting control review. Once the third party looks through the books they would catch Janet’s embezzlement and explain it to the board. I would suggest doing it this way because it wouldn’t compromise my position with the firm and I would be attain the ethical conduct of the IMA which states that it is my responsibility to explain to any parties involved that their organization has a conflict of interest pertaining to documenting, entering of vouchers, checking writing, and the overall payroll system.