December 10, 2012
Legality and Ethicality of Financial Reporting
Excello Telecommunications is looking to record revenue before the earning process has been completed or before the unconditional exchange has occurred. Terry Reed, the CFO is trying to influence the accounting department to look for options to record the sale of 1.2 million in equipment by December 31 to boost earnings on financial statements. The purchasing company does not want the order of equipment delivered until the middle of January. Identifying the legal issues involved and considering state and federal laws and how they apply to the case. Alternative one transferring equipment to an offsite warehouse owned by Excello by December 31 and holding it until January 11 when it could be shipped to data equipment is within agreement of GAAP. Excello violates GAAP by prematurely recognizing income as income earned before it is earned. Technically income does not become revenue before it is delivered to the buyer. It is still a company liability until the buyer receives the product. Delivering it to a warehouse until it can be shipped does not fulfill the service agreement. Also Income acceleration is not accepted because there is no matching of revenue in the period which, the equipment was shipped and sold. Alternative two and three provided by the accounting department are also violations of AAER because not all information was disclosed about incentives for encouraging the company to purchase before the end of the year. This violates Accounting and auditing enforcement release number . 2016. Side agreements need to be disclosed on financial statements. GAAP is violated because of premature recognition and SAB is also violated for the same reason. Financial reporting of revenue should be recognized only when revenue is taken in or realizable and earned. Before revenue is recognized, it...