The Ethical Dilemma of Reporting Personal Loans as Trade Account Receivables
New Wave Images is a graphics design firm that prepares its financial statements using a calendar year. Manny Kinn, the company treasurer and vice president of finance, has prepared a classified balance sheet as of December 31. In January, this balance sheet will be submitted along with an application for a loan from First Peoples Community Bank. An excerpt from the balance sheet follows:
The accounts receivable balance includes a $56,000 loan to Tom Morrow, the company president. Tom borrowed the money from New Wave 18 months earlier for a down payment on a new home. Tom has orally assured Manny that he will pay off the loan within the next year. Because Tom is the company president, Manny treats the amount due as a trade account receivable. In addition, Manny knows that the bank will consider a large balance in trade accounts receivable more favorably than a large personal loan to a single individual. Manny reported the $56,000 in the same manner on the preceding year's balance sheet.
Is Manny behaving ethically by reporting the loan to Tom as a trade account receivable? Why?
Who will be affected by Manny's decision?
Complete this assignment as an essay using APA or MLA format. Your paper should have a cover page, 1-2 content pages, with an additional cover page (if using APA) and a reference page. For this assignment, refer to the Writing Resource links and file attached below. Be sure to support your position and properly cite your sources.
Title: The Ethical Dilemma of Reporting Personal Loans as Trade Account Receivables
Introduction
The ethical conduct of financial reporting is crucial for any organization, as it affects stakeholders’ confidence and decision-making. In the case of New Wave Images, an issue arises regarding the classification of a personal loan to the company president, Tom Morrow, as a trade account receivable. This essay will examine whether Manny Kinn, the company treasurer and vice president of finance, is behaving ethically by reporting the loan in this manner. It will also explore the potential impact of Manny’s decision on various stakeholders.
Ethical Analysis
Ethics in financial reporting requires transparency, accuracy, and fairness in presenting financial information. The American Institute of Certified Public Accountants (AICPA) provides guidelines that promote ethical conduct in financial reporting. According to these guidelines, financial statements should be free from material misstatements and provide a true and fair view of an entity’s financial position. Applying these principles to Manny’s situation, we can assess the ethical implications of his decision.
Transparency and Accuracy
By reporting the personal loan to Tom Morrow as a trade account receivable, Manny is misrepresenting the nature of the transaction. The loan was not made in the ordinary course of business but rather for personal reasons. It is essential to maintain transparency and accuracy in financial reporting to ensure that users of the financial statements have a complete and truthful understanding of the organization’s financial position. By misclassifying the loan, Manny is undermining these fundamental principles.
Fairness and Objectivity
Another ethical consideration in financial reporting is fairness. Fair presentation requires that all financial information be presented without bias or manipulation. By classifying the personal loan to Tom as a trade account receivable, Manny is potentially presenting a biased picture of the company’s financial health. The inclusion of this loan as a trade account receivable may give an impression to stakeholders that the company has a larger customer base or stronger sales performance than it actually does. This misrepresentation compromises fairness and objectivity in financial reporting.
Stakeholder Impact
Manny’s decision to report the loan as a trade account receivable can have significant consequences for various stakeholders involved.
First Peoples Community Bank: As New Wave Images is applying for a loan from First Peoples Community Bank, Manny’s misclassification could influence the bank’s decision. If the bank believes that New Wave has a substantial customer base, it might approve a larger loan amount or offer more favorable terms. This potential misrepresentation could affect the bank’s assessment of New Wave’s creditworthiness.
Investors and Shareholders: Shareholders and potential investors rely on accurate and transparent financial statements to make informed decisions about their investments. Misclassifying the loan may lead to an inaccurate understanding of the company’s financial health, potentially misleading investors and affecting their investment decisions.
Employees: Employees who rely on financial statements to assess job security, potential bonuses, or salary increases may be affected by Manny’s decision. If the financial statements present an inflated picture of the company’s performance due to misclassification, it could create unrealistic expectations or lead to misunderstandings regarding compensation and job stability.
Competitors: Misclassifying personal loans as trade account receivables may give competitors an incorrect impression about New Wave Images’ financial standing. This distorted perception could impact how competitors position themselves in relation to New Wave, potentially affecting market competition.
Conclusion
Based on ethical considerations in financial reporting, Manny’s decision to report Tom Morrow’s personal loan as a trade account receivable is unethical. It violates principles such as transparency, accuracy, fairness, and objectivity. Misclassifying the loan can have significant consequences for stakeholders like First Peoples Community Bank, investors, employees, and even competitors. To ensure ethical conduct, it is imperative that correct classifications are made to accurately represent the financial position of an organization.