group presentation,nov3.pdf

Kelly Steinman’s caseGroup BTN9-3, ACCT1101 Small Case Analysis

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The Case

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Case Description

• Kelly Steinman is the manager of a medium-sized company

• A few years ago, Kelly persuaded the owner to pay her wage pro-rata to the performance of the company

Saturday, November 3, 12

Case Description

• Kelly Steinman is the manager of a medium-sized company

• A few years ago, Kelly persuaded the owner to pay her wage pro-rata to the performance of the company

The more the company earned the more

she earned

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Case Description

• She estimates year-end profit to guess how much she can get in Dec

• She offers several suggestions to the accountant to boost the profit figure if she thinks the bonus is not enough

• One of her favorite recommendations is

Reducing the “Estimate of Doubtful Accounts”(EDA)

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Presentation Structure

• 1. The effect of underestimating EDA on financial statements

• 2. Is Kelly’s action ethic?

• 3. How can we avoid similar cases?

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What Effect does lowering the estimate for doubtful accounts have on the income statement

and balance sheet?

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What is “EDA”?

• EDA, Estimate of Doubtful Accounts

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How to create “EDA”?

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What happens if EDA is underestimated?

• Lowering the EDA makes the profit larger

• It also makes the Balance Sheet look better by overstating Assets since the contra-asset EDA would be understated.

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Is Kelly’s action ethic?

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Can Kelly make these adjustments on the books?• This action is not within the rights of a

manager and is an ethical violation.

• No operating manager should be able to maneuver anything within the accounting function.

• A manager should manage the business, not the accounting for that business.

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What are the purposes of the financial statements?

• A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity.

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Who will use them?

1. Owners and managers make important business decisions, which based on financial analysis from the statements that affect its operations. Statements also give them the overall picture of the company.

2. Employees can bargain the salaries based on the performance of the firm.

3. Investors perform analysis based on statements to assess the performance of the firm and thus formulate investing strategy.

4. Banks and creditors use statements to assess the credibility and liquidity of the firm, and thus decide the credit limit offered to the firm.

5. Taxation officers calculate the tax charged on the firm based on statements.

6. General public are also interested in financial statements.

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These users will all make wrong decisions if the

statements are falsified!

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Accounting Fraud is serious and unethical

• In this case, Kelly’s suggestion is violating the GAAP -

• “The Reliable Information Concept”

• The suggestion is destroying the trust from the users.

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How can we avoid similar cases?

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Multiple way to avoid this violation

• Limited access

• Periodic independent verification

• separation of duties

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Periodic independent Verification

• Independent accountant can review the accounting records periodically

• The independent accountant can monitor any abnormal adjustment and correct them,

• Making it unable for Kelly to manipulate the accounts.

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Limited access

• The access of financial statements should be limited and requires authorization before a manager can view it.

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Separation of functions

• The company's organizational plan should separate functional responsibilities.

• Managers should not be allowed to suggest any kinds of adjusting entries.

• Accounting should be independent.

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Should salaries peg to performance?

• Pegging salaries to the performance can boost the incentives of the employees to perform better.

• However, the proportion of these bonuses should not be big, to reduce the motivation to falsify.

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Conclusion

• Kelly’s suggestion is unethical.

• Accounting fraud is a criminal offense.

• Not only the company, many stakeholders will suffer from loss due to one’s greed.

• Separation of functions should be the structure for a medium-big sized companies.

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