Excello Telecommunications: Profit at a Price
There are moments in life that can forever define and potentially change not only an individual but an entire corporation as well. With the fiscal year of 2010 coming to a close, Terry Reed the operating CFO of Excello Telecommunications faced such a dilemma. For the first time, Excello was on track to finish out the year below anticipated financial goals, which would resonate throughout the company and its’ stock. This presented Excello with the task of searching for solutions while maintaining ethical and legal choices to the betterment of all parties involved.
While searching through problem solving solutions, Reed learned of a ...view middle of the document...
The core of these principles exists to standardize the preparation of financial reports across all businesses in order to protect investors, creditors and the public. Reed understood the legal ramifications associated with straying from GAAP and was certain to instruct Fuller to adhere to the applicable regulations.
As a publicly traded company, Excello also had to adhere to the provisions of the Sarbanes-Oxley Act (SOX) of 2002. These regulations were developed as a result of the numerous corporate accounting scandals the rocked the country in the late 1990’s and early 2000’s. Three major provisions of the SOX are applicable to the Excello situation and should be carefully considered when evaluating solutions to the accounting conflict. Section 302 establishes individual responsibility for the publishing of corporate financial reports. This includes the strict observance of internal control mechanisms to prevent fraudulent reporting. Section 401 of the SOX necessitates full disclose of accurate financial transactions on all published reports. Section 802 allows for the criminal prosecution and penalties of jail time and hefty monetary fines for those involved in violations of the SOX provisions (Sarbanes Oxley Compliance, 2013).
Understanding these regulations is essential for Reed and Fuller as the decision-making processes moves forward. Excello’s pre-established internal controls of not recognizing a sale until the client takes delivery of the product is being circumvented, which is a direct violation of Section 302. This provision also states the any information that materially changes the financial statement must be disclosed, which in this case would be the early revenue recognition associated with the Data Equipment Suppliers $1.2M sale.
In addition to setting Excello up for infringement of the SOX, Reed has requested the Fuller defy the GAAP principles of revenue recognition, which is the basis of accrual accounting. This GAAP concept specifies that revenue must be recorded in the period in which it was earned (Weygandt). The accounting principles of full disclosure, and material disclosure, are also being ignored in this scenario. These standards require the corporations accurately and fully report financial results and that any transactions that greatly change the performance results be identified (Weygandt). Reed is requesting that the Data Equipment sale be recognized early, but that the financial reports refrain from identifying this transaction as a material fact in the success of the company for the period.
The American Institute of CPA’s (AICPA) has also established a set of business ethics guidelines to be followed by all accounting professionals. These standards focus on responsibility, public interest, integrity, objectivity and independence, exercise of due care and working within the scope and nature of service to be provided (Mintz). The executives at Excello are considering violating the public...