South City Electronics

1. The overarching authority to address the question of recognizing revenue within the current quarter, is addressed in the AICPA Code of Professional Conduct ET 1.130.010.01.a.. The code states that one should not knowingly misrepresent facts by making materially false and misleading entries. In terms of the case, South City Electronics looked to accelerate a bill-and-hold transaction with Victor Systems in order to avoid being in default of a $10 million loan. It is clear that this deal was knowingly done with the idea of avoiding default, but is it materially false.
In order to address this question, we must take a look at the lowest standard of ethics, the law. According to the Codification of Staff Accounting Bulletins, Topic 13. 3a,
First we need to define materiality. In the most basic sense, materiality is the idea that there are times where transactions are so minuet, that they are not worth measuring with precision . For example, a misuse of funds of 10 cents will not have a large affect on a reasonable’;s investors decision. In general, an item is not material if it affects earnings between 5 to 10 percent (Textbook). From the facts of the case, it would be in the best assumption that this is indeed a martial issue. Originally, the company’s earnings are $160,000. In order to reach the debt convidents the company must gain at least an additional 240,000 in revenue. Considering that the rgonition of revenue from the agreement would allow SCE to meet the debt convident for the loan, then this is a material issues as it boost earning by an additional 60 percent, well above the 10 percent threshold. This means that this is an issue that the auditors will need to take a further look
This states that the company or the company would act within their own best interests. In the short-term this would easily apply them to record the revenue in the current quarter so they do not get negatively affected by the failure of the debt convidents. However, this action can lead to a slippery slope for the company as a whole. Even though this action is not a sure fire unethical, one can certainly make the case for it to be so. Therefore, this may cause a snow ball effect where the company will start to push other accounting measures in the future in order to meet their debt covenants or the investors’ expectations themselves. In addition to this, if this is deemed unethical and word gets out then they have their reputation on the line as well as this would reflect badly on themselves. Even more so would they be reflected poorly if they continue aggressive accounting practice and then starts to fall in the grey area of accounting more often than not. If they were to go down this path, then they would potentially see a potential court case, a fine from the AICPA, and a possible loss of their CPA license from the State Board of Accountancy. Therefore, even if they are only thinking about themselves, they should very much consider differing the revenue for the long-term perspective of their