ANDAL, MARY GRACE L.

Corporate Governance, Business Ethics,

BS ACCOUNTANCY 2A Risk Management and Internal Control

Case 3:

The net income of Cruz’s, a department store, decreased sharply during 20X5.
Mark Cruz, owner of the store anticipates the need for a bank loan in 20X6.
Late in 20X5 he instructed the accountant to record a P26,000 of furniture to
the Cruz family, even though the goods will not be shipped from the
manufacturer until January 20X6. Cruz also told the accountant not to make
the following December 31, 20X5, adjusting entries:

Salaries owed to employees P18,000

Prepaid insurance that has expired 5,300

1. Compute the overall effect of these transactions on the store’s reported income for
20X5.

Answer: In this scenario, transaction manipulation is evident because Mr.

Cruz instructed the accountant to perform the following acts: first, record

a sale of P26,000 even though it has yet to be earned, which will increase

Cruz's Department Store's net income by 20X5. Second, recording

employee salaries will increase salary expense by P18,000 and increase

insurance expense by P5,300, both of which will reduce the net income.

Based on the facts stated above, we can deduce that Mr. Cruz

intentionally instructed the accountant to keep the net income high so

that he would have a good chance of getting the approval for the the

bank loan. This is also why, on December 31, 20X5, he overstated their

annual revenue by P26,000 and directed the accountant not to make any

adjustment entries.
ANDAL, MARY GRACE L. Corporate Governance, Business Ethics,
BS ACCOUNTANCY 2A Risk Management and Internal Control

2. Why did Cruz take this action? Is this action ethical? Give your reason, identifying the
parties helped and the parties harmed by Cruz’s action.

Answer: Based on the facts presented above, I realized that the real

motive of Mr. Cruz's actions is to show a higher net income or profit in its

book of accounts. I was also able to deduce that Mr. Cruz is desperate for

approval for the bank loan, which requires good credit. As an accounting

student, this action cannot be justified because the act itself is unethical.

He knowingly and maliciously provides false information in order to

benefit himself while harming others, specifically the creditor and the

accountant. Thus, in terms of personal ethics, Mr. Cruz simply violated

principles of fairness, integrity, honesty, and trustworthiness, which are

all critical in establishing one's credibility as the owner of a department

store. The business, on the other hand, does not adhere to transparency

and fairness, which are essential for good governance.

3. As a personal friend, what advice would you give the accountant.

Answer: As a friend, I will be straightforward because advice in this

situation should not be sugar-coated. I will inform him or her that an

accountant is equipped and trained to uphold professional ethics. We

always look at the big picture of a situation, we analyze the next step in

dealing with problems, and now it's time for him/her to critically

evaluate
ANDAL, MARY GRACE L. Corporate Governance, Business Ethics,
BS ACCOUNTANCY 2A Risk Management and Internal Control

and apply everything he/she learned in the academe. An accountant

confirms with Integrity, impartiality, objectivity and professional

competence. The instruction to manipulate the transaction will have

consequences, and as the attending accountant, he/she will also be held

accountable. Thus, I will advise him/her if the owner persists and he

refuses to follow the instructions the only option is to resign from the job.

He or she has worked very hard to become an accountant, and credibility

is extremely important in this profession. I'll leave the decision to

him/her because we can't impose our decision on others, it is best to

make them realize on how important it is to do the right thing.

Case 4:

On a recent trip to Hongkong, Brian Santos, sales manager of Micro-

electronic Devices, took his wife at company expense. Erika Tan, vice-
president of sales and Santos’ boss, thought his travel and entertainment
expenses seemed excessive. Tan approved the reimbursement, however,
because she owed Santos a favor. Tan, well aware that the company
president routinely reviewed all expenses recorded in the cash
disbursements journal, had the accountant record Santo’s wife’s
expenses in the general as follows:

Sales Promotion Expense 35,000

Cash

35,000
ANDAL, MARY GRACE L. Corporate Governance, Business Ethics,
BS ACCOUNTANCY 2A Risk Management and Internal Control

1. Does recording the transaction in the general journal rather than in the cash
disbursement journal affect the amounts of cash and total expenses reported in
the financial statements.

Answer: Generally, it is important to record transactions in both the

general journal and the cash disbursement journal to avoid cash

being misdirected or misappropriated. Moreover, if in such cases

where a transaction is only recorded in general journal and not in a

cash disbursement journal I think that there will be no effect with the

amount of cash and total expenses to be reported in the financial

statements. Provided that the purpose of special journal is to make it

easier and more efficient to find a specific type of transaction and

speeds up the process of posting, in that sense, as long as transaction

is recorded in general journal the same amount will still be reflected

in the reported financial statement.

2. What is the ethical issue in this situation? What role does accounting play in ethical
issue?

Answer: The ethical issue here is that Ms. Erika Tan knows exactly

that Mr. Santos act of splurging company’s money for his trip in

Hongkong is excessive but still tried to turn a blind eye because she

has owed him a favor. Thus, she uses her authority as the vice

president of sales to command the accountant to record a Sales

promotion expense so that the president will not notice the

ANDAL, MARY GRACE L. Corporate Governance, Business Ethics,
BS ACCOUNTANCY 2A Risk Management and Internal Control

transaction. The action of Ms. Erika Tan basically violates

professional ethics specifically her objectivity, integrity and

professional behavior. In addition, she tried to manipulate the

recording of transaction which only implies that she is not a credible

person to fulfill the responsibility of a Vice -president of sales.

Furthermore, all of the cases mentioned above made me realize how

disturbing it is that accounting plays a role in committing these

unethical acts. Accountants have been placed in a difficult position in

which they must decide whether or not to follow instructions which

often lead to violation of ethics. Unfortunately, in real life practice,

some people tend to forget the core of professional ethics that was

instilled in them. Whilst, accountants must remember to be the

“watch dogs” of the business world

and ensure that all ethical principles are followed.