Legality And The Ethicality Of Financial Reporting Accounting Essay

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Excello Telecommunication that has recorded an excellent performance. With an upsurge win competition, the company has not been in a position to meet its financial estimates. There were reduction in the stock prices as the investors got nervous and the analysts could give the company negative reporting. The executives were also worried on their failure with regards to meeting the estimates which could impact the bonus and stock options.

In their quests of making expectations, there is a serious sale that is going on. Despite this, the sale requires that all the involved goods must be delivered in a subsequent accounting period and not the current period. According to GAAP, the firm cannot recognize the indicated revenue during the entire current period. Despite this, the CFO, Terry Reed directed the accounting team to come out with a mechanism of booking the sale during the accounting period. The team is headed by Mary Fuller. The discussion in this paper will focus on the ethical and legal ramifications of undertaking the route. There will also be the discussion of the moral consequences besides knowing whether the company is breaking the law.

Legal Issues and Applicable Laws

The firm must adhere to all the laws and other regulations as set. Among the regulations include Generally Accepted Accounting Principles (GAAP), Sarbanes-Oxley Act of 2002 (SOX), and AICPA code of conduct. The rules impact the mechanism, of financial reporting in the company and also help sin the actions of major principles of accounting. As a result of this, the accounting team must ensure they get the best method that will help in maximizing g the wealth of the shareholders. Albeit the earnings estimates could be gotten through the adoption of illegal treatment of accounting books, it would not be of more help to the firm as it would be more disastrous when the Wall Street detected it.

Sarbanes-Oxley and Excello Telecommunications

The accounting scandals of 2001 namely Enron, and Tyco resulted to the Sarbanes-Oxley legislation. The act was pushed by Senator Paul Serbanes and Representative Mark Oxley which helped in the reshaping of role of corporate governance in the US. The consequence of violating the legislation is severe for both the involved firm and the management.

The company CFO intends to post a sale of $1.2 million during the financial year of 2010. The customer that it will be doing the sales for is the Data Equipment Systems. The company is also reported not having facilities of storing the equipment. To show the sale of 2010, there are a number of illegal activities which could be involved. For instance Excello could attempt documenting the deal before the actual transaction could occur. This severely violated a number of components of SOX which includes a number of sections like 302, 401 and 801.

Section 302 focuses on cooperate responsibility for the fiscal reports. The company has the sole duty of releasing factual accurate financial statements. Section 401 likewise focuses on relevant disclosures in periodic reports while 807 focuses on various criminal penalties related with the executives involved in various instances of cooperates fraud. Under section 302 all the CFOs and the CEOs are fully accountable for all the contents of the fiscal reports.

GAAP and Excello Telecommunications

GAAP is an accounting principle body which must be followed when preparing any financial reports. Any company releasing its statements, it must comply with GAAP.

All the accounting departments must comply with the principles set by GAAP as they account for $1.2 Million. Major components of GAAP that are relevant to the case are the revenue regulation rules, accrual basis, regularity and dependability. Under the accrual basis, all the revenue is recognized when generated and all the relevant expenses associated with the revenue are matched with it.

A number of people are used to cash basis. Under this basis revenues are recognized when cash is fully paid out. Under the recognition of revenue, all the principal revenues should be accounted for during the accounting period where the specific services were rendered. In the cases of a manufacturer,, it is when goods changes hands between the buyers and sellers. The transaction which is under discussion cannot b reported during the 2010 financial year because the sale took place in 2011. Excello is currently still possessing good at the end of the year and therefore it is impossible that the sale can take place.

Perhaps the most considerable thing is that the financial statement must be consistent and reliable and therefore they can help investors as they tend to make decisions. When the sale is reported in 2010the statements would be irrelevant to the investor. Besides, the principal of constancy stipulates that accounting principles must be applied in a similar way in all periods of the reports.


All the CPAs who are members of AICPA are purely government by the AICPA code of conduct. The conducts takes into consideration the needs of all the financial statement users. Its main aim is to ensure that the public interests are taken into consideration. Excellos accounting department have the duty of following the professional duties, be honest in their financial prospering and protecting the public interest. This will uphold its ethical status and protecting the interest of the public.

Ethics and Events

Terry intends report $1.2 million during the period of 2010 therefore by the end of the year profit will be on a higher note and therefore the management will be in a position to get bonuses. Besides the prices of the shares would be relatively high and also serving the interest of a number of managers who have stock options.

Reed intend to making the firm be profitable by all the necessary means. Marty Fuller discussed GAAP principles with Terry and in the discussion Terry only intends to make the company more profitable regardless of the cost.

Excello Telecommunications Alternative and their ethicality

The accountants at Excello adopted three main scenarios which can be used by the company can get the sale in the period of Reed intends in it.

Transferring the machines which are sold in the transaction to an off-site storage family on the 31st December. The proposal was to hold the merchandise until January of 2011 as it is delivered to the customer. This results into the inventory moving from the physical location that a number of investors will be observing.

Sending the equipment directly to the customer having the knowledge that they can merchandise right back to refund once wit is arriving g their location.

Offering the customer of 10% if by chance the product is accepted as 31st December instead of January of 2011.

A clearer looking at the decisions the first one is unethical. Despite the fact that the goods are located at an off-side storage facility, they are in the hands of Excello. They still hold the legal right and therefore the sale has not occurred.

The second level is not ethical. When one has the chance of the possibility of sending goods back since they were delivered earn that must be fully discovered in financial statements.

Besides, if by chance the customer returns the entire merchandise between the ends of the year and when the financial statements are given and may be disclosed in the footnotes to the $1.2 of the financial statements is purely material to the Excello.

The final option is the most accepted ethical scenario that the accounting department adopted. The adoption is a win-win scenario where the customer will be hefty discount and then the company will be in a position to book the $1.2 million sale by the end of the year. Despite the fact that the customer does not have the right space for the product, therefore they can make the necessary arrangements for the storage. The management hopes that the storage would not coast more than the discount received.


The CFO, Reed of the company was a moving down the slippery slope. The accounting department had to properly think fast on their feet so as to come up with the right method that will increase and preserve the wealth of the shareholder. They accomplished that through the offering of the customer discount if they accept to take possession of the product by 31st December.