Hello I need help with the response to two peers discussion:
In your responses to your peers, discuss whether you would have responded in a similar way. Discuss similarities and differences in your approaches to this issue.
Ethics and Construction Costs
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You are the accountant for a division of a company that is constructing a building for its own use. It is January 2017, and you are working on closing the books for 2016. The CEO of the division stops by your office and says, “I have some questions about our building. Although we started construction at the beginning of June this year, we started planning it at the beginning of the previous year. I believe that we can capitalize interest since then. Check to see if we did capitalize some in 2015. If not, we can take it out of this year’s expense and get a double dose. Also, I want you to add lots of overhead to the cost of the building so we can increase our profit for this year. For example, you spent quite a bit of time on the project. So perhaps we could add 1/12 of your salary to the cost of the building. You get the idea?” When the CEO leaves, you check the files and find a letter to an architect dated January 2, 2015. There are numerous subsequent letters to and from the architect.
There is a lot to consider in this scenario. While an accounting error may have occurred in 2015, correcting it would involve an amendment. That would be the only ethical way to show the expenditure. “Taking it out of this year’s expense and getting a double dose” is unacceptable and goes against GAAP guidelines. I would explain to the CEO why it is unacceptable and steps on how we could adequately correct the mistake. We would also need to explain to the stakeholders and lenders we are making corrections due to an accounting error. Since we indeed did start planning and working on the project in 2015, we can rightly take the expenditure for that year but can not double up in 2016 to recoup the charges. The books must show work performed within the same year. There is the option of leaving 2015 as is and recording expenses accrued within this year and in the future.
It would be wrong to double up ethically and morally instead of correcting an accounting mistake. It will throw your books off and could also send a message to your investors and lenders that you are not correctly reporting charges. While it could be easily fixed, the damage could be done to your reputation by “doctoring” the books to recoup expenditures.
My response to the CEO would fall along the lines of this:
Although it is true that interest expenses incurred during a building’s construction can be capitalized as part of the building’s cost, it is crucial to remember that we still have to follow U.S. GAAP and FASB. Considering that we didn’t start building until June 2016, we are unable to capitalize interest expenses from 2015. Such an attempt would not be in compliance with GAAP and might result in financial insincerity.
In my opinion, because the time spent on the project did not immediately aid the construction process, allocating costs like a quarter of my income to the building violates the cost allocation guidelines. If such a time existed, it has been allotted in the proper manner.
Knowingly misrepresenting financial data is wrong from an ethical standpoint, and doing so could damage the company’s brand, undermine stakeholder trust, and subject us to legal and ethical ramifications. We have a responsibility to make sure that our financial reporting is transparent, accurate, and equitable as financial experts.
To boost our financial performance, we can look at alternative ethical and legal possibilities.