Kelsey Ewell, Maria Herbers, George Knudsen

Accounting 2540
Ethics Study of the First Mates Wholesale Boating Supply Company

The First Mates Wholesale Boating Supply Company (FMWBS) is a company that has had to face a lot of
critical decisions through the years. Among those are striking the balance of keeping prices low to be
able to attract customers; while at the same time, making the sales volumes required (while raising

prices from time to time) to be able to not only make a profit, but to make enough of a profit to keep
stock prices moving in the right direction.

In the last year, the financial statements have not produced the numbers that are expected from

FMWBS and the company is faced with the task of doing what they can to save and take actions that will
result in the numbers being sufficient enough to be able to keep the company moving in the right

direction financially. Some of the decisions are more ethical and likely better business decisions in

general than others. Some of the decisions may also not be the most ethical decisions; we are going to

look at some of the decisions and see whether or not they are decisions that should be made (or could
even legally be made).

One of the first decisions that was made when the head of promotions, Jeremy, suggested that they
stop the ad campaign. The decision to stop the marketing campaign is one that is a great idea if you
want to immediately reduce expenses. By stopping the ad campaign in itself, there will be less bills

coming in from newspapers, radio stations, television stations, billboard companies or whomever else

were providing advertising platforms for FMWBS. While this decision is ethical, this may be something
that could be looked at as reducing the expenses, but the company will want to decide if the loss of
revenues that may have come in with the advertising that will not be coming in is worth it.

As a second part of the same decision to stop the marketing campaign, Jeremy suggests that they not
pay the bills (nor accrue them) at the moment. It does not say directly that Jeremy is saying to not
accrue them until the next year, or financial period, but I believe that it is implied. This part of the

decision is not only unethical, but to comply with GAAP; the expenses should be accrued immediately

when the services are provided. If part of this decision is not to accrue bills for services that have been
provided to FMWBS, then that is unethical and not legal for a company.

Further, even if the company were able to accrue the expenses in the following financial period, the

problem with this on paper will be that the company would have to come up with additional sales in the
coming financial period to justify the expenses which are being carried forward to the next financial

period. Making decisions like this can make management feel like they are always playing catch up as

they are expected to have financial performance in current periods retroactively make up for financial
pitfalls in past periods.

Jeremy has another idea that he believes will help the company to produce better numbers, and that is

to ship out automatic orders for a marina before the end of this quarter that would normally be shipped
out in the next quarter. This decision may easily be justified by management because they could maybe
be shipped with a delayed method of shipping so that the marina may not even notice the difference.
Shipping items on a delayed shipment may even allow for the company to book the revenues in the

current period (as they would have been earned once shipped); making the decision ethical. While this

decision may be ethical, it may not even be a good business decision because for a customer who orders
quarterly, then there will be five of their quarters sales in one fiscal period, and eventually three

quarters worth of sales in one. Booking revenues this way for a customer that has regular orders will

definitely make it look like the company has fluctuating sales with this customer; the decision may not
be the most sound as far as a business decision is concerned.

Jeremy seems to be a really creative individual as he has yet another great idea, and that is to call up

some of the customers to see if they would allow FMWBS to send them early invoices at a discounted

rate. This part of the idea (as there is more to the idea, but at least this first part of the idea is ethical)

is ethical in itself. Asking customers to pay early at a discounted rate is something that companies do all
the time. Gym memberships are often sold at a much lower rate if they are pre-paid, car insurance

usually work in the same way. Companies are usually more than happy to receiving less cash now than
they may have received later. In transactions that involve suppliers and customers, it is customary to
have an invoice marked 2/10, net 30 (or something similar). Doing this, the supplier is inviting the
customer to make an early payment at a reduced rate.

Because of this, we want to give Jeremy credit for coming up with a really ethical way of getting some
sales immediately. The part of the idea of bringing sales forward, is that it may give a false sense of

where the sales are. Stockholders are not going to want to hear that the sales may have gone down in
the coming year because they brought the expected sales into the previous period; they are going to

want to see at least the same sales, if not higher sales in the coming year. The company may be able to

turn this as a motivator to increase the sales and productivity of their workers, but if the company is not
able to deliver, then the financial statements in the coming years are going to unjustly suffer.

While there was more to the idea than I had said, that is because while Jeremy suggested that they see
if the customers will allow for invoices to be sent out early, he says that they can hold the goods until

the customers need them; this portion of the idea is what makes the idea unethical. Had Jeremy kept
the idea at checking with customers to see if they could be shipped early, it may have been a bad

business decision, but remained ethical. The idea to keep the goods until the customer physically needs
them makes the idea something that is unethical. The reason that the idea becomes unethical because

of that element is that the revenues are not supposed to be accrued until they are earned. In a business
like this where they are shipping goods to customers, the point that revenues are earned per GAAP, is

likely to be when they are shipped to the customer and no longer in the possession of the warehouse. I
would encourage management to not follow through with this one of Jeremys ideas because it is
unethical, and illegal per GAAP; it is also not a good, sound business decision.

Jeremy, the marketing director, was not the only one that had some great ideas to save money; one of
the back-office workers, Hank had some ideas. Hank came up with the idea to reclassify some of the

expenditures for a roof repair of the warehouse instead as capital improvements. Doing this, Hank is
having the idea that some expenses would not be seen as expenses, and they would be seen as an

increase in assets. By doing this, reducing the expenses will raise net income because the expense would
not be subtracted from the revenue.

Hank states that we could have done it that way from the beginning. Well, frankly, if it would have

been legal to do things that way in the first place, then it should have been done that way and the past

years financial statements should be corrected as such if they were not doing it correctly for other items
like this. This is an unethical decision because a roof repair, to put on a new roof, does not significantly

make the building better. If the project would have been to put a new roof on, say, an expansion part of
the warehouse; then absolutely this would have been a capital improvement. The way that things are

though, the new roof is an expense as the building was not significantly improved. Even if the shingles
were of the best materials, the roof still provides the same function for the same space that the old

roof did. Per GAAP, a roof repair in this case does not qualify as a capital improvement, this course of
action would be unethical even though it may make the net income appear higher.

One more idea that Hank has is to send some shipments to some customers that FMWBS has been

trying to sign on as ongoing customers for some time as sales when in reality, they are really just for the
marinas (customers) to be inspected. The marinas are not customers on an ongoing basis for the

products at this point, Hank is just saying that they can ship the products out as-if they are sales,
assuming that they marinas will like them and want to be customers.

There is even doubt in the way that Hank says things, because he says that by the time we touch base
with them....to get their decisions, itll be next quarter and well worry then about any returns or

disinterested outcome. A great example is the Disney Movie Club which sends mailings wanting people
to become subscribers and buy movies from them. The idea that Hank has would be the equivalent of
the Disney Movie Club sending out movies that were not ordered, but that they assumed the people

may want. Hank is suggesting that the company book sales, not only knowing that customers had not

ordered items with the intent to purchase them for sure. The company is assuming that there would be
a good chance that they may be returned; but they want the sales to be counted as if it was revenue.
This course of action is something that is definitely unethical because the sales had not really been

earned. While there is some sort of relationship with the marinas, if the marinas did not actually place

the orders or have some kind of arrangement in place, then the sales were not really earned in any way.

Even if the course of action were ethical, again, this decision is one that could force the company to start
playing catch-up again because the sales could actually be coming from the marinas, but at a later date
after the marinas had a chance to inspect the income.

Ironically, reading the materials that is sent by the Disney Movie Club, they do have it built in that they

are going to automatically ship customers the movie of the month, and this action will take place unless
customers indicate they do not want the item. I am guessing that there are quite a lot of people who
end up purchasing these movies because they forget to send in the card declining the movie of the

month, and then they never go to the trouble of getting the movie sent back. These kinds of automatic
subscriptions are business actions that may not be the most ethical, but at the very least, they can say

that they provided material to the customers advising them of the way things worked and the
customers should have known and been prepared.

Recently Prudential took action on some of their long-term care insurance plans where they decided
they were going to automatically assume that customers wanted to pay more for the inflation

adjusted premiums unless they physically said they did not want to. In years past, no action was taken

by Prudential unless customers proactively asked to have the inflation-adjusted coverage. These are all
examples of decisions that are at-best barely ethical but in the end they produce higher revenues and
incomes. The idea that Hank has to send out and classify sales before the customers are aware that
they are sales is not ethical.

More than the decisions on actions that are going to be taken for the coming financial period, there

were decisions that were made for the last financial period that may not have exactly been ethical and
could be causing problems this financial year.

One of the other leaders, Miriam Arthur, did come up with one idea that I could get behind. Miriam

decided that for the rest of the year; she would take a much-reduced travel schedule. While Miriam

preferred to meet with clients in person, she realized that the travel reimbursement expenses would go
down a lot if she were to teleconference more. This idea has no ethical flaws, in fact, the idea may in
fact expose some ethics if the company looked at some past years and discovered that Miriam was
taking more trips that may have been necessary.

One of the workers that helped Miriam take care of the finances, Molly, also suggested that she could
stretch out the depreciation on some of the depreciable assets. Molly decided that they could

depreciate the assets over twice the time which would effectively bring those expenses down each year,
but drag the expenses on for longer years which would reduce the immediate depreciation expense and
raise net income that way.

The idea to stretch out the depreciation of assets to longer than normal is one that is not only unethical;

but it is not a sound business decision. The reason that the decision to extend the depreciation expenses
is not sound is because what that opens a business up to would be to double paying for assets at the

same time. For example, if they had a delivery truck that they had been depreciating on a 7-year basis;
but they decided to stretch that out to 14 years, then that would reduce the yearly expense (which

would raise the net income). What the company would be exposing itself to is having the truck die after
less than 14 years.

The effect would be to have to write off all the remaining depreciation on a dead asset, instead of

spreading that amount over time. They would then have to come up with the money to buy a new asset
at the same time. In a year that may happen, they may have to triple their sales (or creative accounting

efforts) to maintain their net income levels. Mollys idea to stretch out the depreciation is an idea that is
neither ethical, nor a sound business decision.

The other idea that Molly brought to the table is one that could have some drastically negative

consequences if it goes wrong, although, ethically, it is not a decision that is wrong. Molly suggested that
they relax the credit screening for new customers in an effort to expand their customer base. Molly

suggest that they would just have to more closely monitor the payment patterns, but she believes that
the efforts would work.

This decision is not ethically wrong, in fact, some people may see Mollys idea that may be really nice to
people that may not have the best of credit scores as it would help them purchase their items. If the
company decided to implement this effort to raise sales, then it is true that they could get higher

income and thus higher earnings; but if in fact the customers did not pay (as may be indicated with their
credit scores), then the consequences could be drastically negative as the amount of accounts
receivables that would be written off may cause a loss of revenues in the end.

In addition to future decisions that may not exactly be fully ethical, let alone business decisions that may
not have been the best business decisions; there have been some decisions in the past year that may

not have helped the company. Just last year, Miriam Arthur made some decisions that may have made it

so that the financial performance of her division may not exactly be representative of the work this year.
One of the things that Miriam had happen was that some major customer shipments were delayed until
this year when they probably should have been last year. This is a decision that may not really be illegal,
nor really unethical.

Miriam was thankful that contributed to this years numbers being higher this year so that the

department had a solid year. The reality is that the sales from last year that were brought into this

current year are just not representative of the work done. We do not know if the previous year was a
good one, and maybe they were, in which case Miriam may just have been preparing for this year so
that there was some room for a drop in sales if the case needed to be.

One other action Miriam took in the previous year was that some of the expenses with a major trade

show from this current year were prepaid and expensed last year. Again, this decision had a great effect
on this years numbers as the profits and revenues from the trade show probably appeared to be a

higher margin, but per GAAP the expenses may be able to be prepaid, but then they should be recorded
as a liability and then expensed when the expense is accrued.

The matching principle in GAAP exists for this current situation. If expenses are appropriately matched
with the revenues (or as close to possible) then the net income that is reported on the financial
statements will be as truly representative as they can be.

Both of the decisions that Miriam Arthur was in charge of made it so that the true net income that is

reported for the current year may not actually be representative. The truth be told, the income may be
higher than the income that was really earned. What this may mean for Miriam Arthur and her

department is that they may have to come up with substantially higher sales in the coming financial
period to keep the income at levels that they are showing at this year.

Because of the decisions made by Miriam Arthur, the company is likely going to have to play catch up. In
the case of the actions suggested by Hank and Jeremy, the company will have to get extra sales to

catch-up for future revenues that they may be bringing into the current year. With Miriams decisions,

the company (or her department) may be playing catch up because of past years sales that she brought
into the current year. (Who knows, maybe there are decisions that Miriam has made where there are
sales that are going to be earned on the first day of the next financial period).

Recognizing what things are ethical and what things are not is something that can sometimes be difficult
in the business world. With a set of financial statements having such an effect on the impression that
investors, clients, customers and even just the general public can have; there is a great chance that
often times people may be willing to cut corners to get the financial statements to look right.

There will be times that people may feel fully justified to update the numbers in the financial statements
to make things appear better. An example would be that sales may have been down, or there may have
been a major customer loss (lets say something like an office supplier for long-time customer Lehman

Brothers who loses their business because the company abruptly went bankrupt, and Lehman may have
accounted for, maybe 20% of all their sales).

In a case like this where a business may have lost a customer for reasons that were out of control, there
may be desires to fudge the numbers because it will all balance out in the end. What if this company

that may have lost a major customer had sales that they knew were coming (maybe a customer who

told them that they would have ordered now, but they need to wait for the new sales year because they
dont want the expenses in the last year, which just happens to be the same sales year the company is
struggling).

I could really see how people may want to just bring some sales into the new year to make things look
better because they really may know that the companys sales are in better shape than the financial
statements are going to make things appear. Combatting feelings and tendencies like this can
sometimes be difficult.

One thing that may be useful to help members of a company fight the urge to make the financial

statements look better would be to go through a detailed ethical training. Ethical standards could be
established, published and gone over with employees in training showing things that are ethical and

what are not. As part of the ethical training; a company could come up some policies for transparency.

The company could dedicate themselves to be ethical and make it the standard that they encourage the
employees to be ethical no matter the effect on the company and its appearance.

As accounting professionals, we can be supportive and proactive in developing programs such as these
and going over situations. As a key player in an accounting role within a company, developing a weekly
e-mail where a teaching situation was presented to employees for analysis and discussion may be

helpful. I feel that presenting situations that may be looked at as no-brainers are often good; because

sometimes, a no-brainer situation like moving sales into the current year that is really not made until the
coming year is an easy thing to do for a company to raise the net income for the current year.

Bringing situations like these to light in e-mails and trainings in front of everyone would have a couple of
advantages: First, All employees would be aware of the situation and know that it is a no-brainer and

so if they were to see anything like that happen, they should be more than aware and willing to advise
the people involved not to take that course of action, and Second, the people that may be tempted to

take a course of action such as that, may be steered away from allowing the course of action to be more
than a thought because everyone is aware of the unethical actions.

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One other thing that we can do as accounting professionals in the current world would be to encourage
that companies be required to have accounting professionals in the meetings with the management
teams so that they are right in front of business decisions. If accounting professionals were always
involved in management meetings, if there were decisions that were being tossed around by

management; then they would be in a prime position to try and kill the idea before it gets off the
ground.

Further, more than requiring accounting professionals to be in the meetings with management, there
could be a requirement that the accounting professional were required to give an evaluation on the

ideas, especially ideas that involved numbers on the financial statements. We even believe that it may
be a good idea instead of having one accounting professional; there could be a group of 3-5 (or more)
employees that could be in charge or reviewing ideas for ethical consideration.

There may be times that come up when there are actually really tough times; and there may be things

that would easily make the numbers become easier to stomach by moving sales, postponing expenses,
reclassifying expenses as capital improvements and such would help the financial statements put on a
much prettier impression. If one person were in charge of doing the evaluation and making ethical

evaluations and decisions, there may be some times where they may look the other way or stay silent
because they did not want to be the one that ruined things.

If there were a committee that were in charge of the ethical evaluations; then members could rely on
the strength of the others with the same responsibilities to help the committed make the correct

decision. If there were something that the whole committed knew was wrong, but they were staying

silent because they wanted to help the company; the odds are better that at least one person would be
willing to speak up if there are more than one person. The one person would be more likely to rely on
the strength and support of their fellow employees.

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Evaluating the ethical nature of decisions of the First Mates Boating Company and seeing how we view
these decisions, this has brought to light some of the things that are likely going to be a part of our

professional world. Being able to examine the situations, and even come up with ideas that we can help
identify these situations and work with the companies that we are going to work for; we will hopefully
be able to contribute positively to the professional and accounting world.

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