declined greatly this year due to the passage of legislation outlawing the sale
of several of Santa Fe’s chemical pesticides. In the coming year, Santa Fe will
have environmentally safe and competitive chemicals to replace these
discontinued products. Sales in the next year are expected to greatly exceed
any prior year’s. The decline in sales and profits appears to be a one-year
aberration. But even so, the company president fears a large dip in the current
year’s profits. He believes that such a dip could cause a significant drop in
the market price of Santa Fe’s stock and make the company a takeover target.
To avoid this possibility, the company president calls in
Diane Leto, controller, to discuss this period’s year-end adjusting entries. He
urges her to accrue every possible revenue and to defer as many expenses as
possible. He says to Diane, “We need the revenues this year, and next year
can easily absorb expenses deferred from this year.We can’t let our stock price
be hammered down!” Diane didn’t get around to recording the adjusting
entries until January 17, but she dated the entries December 31 as if they were
recorded then. Diane also made every effort to comply with the president’s
request.
(a) Who are the stakeholders in this situation?
(b) What are the ethical considerations of (1) the
president’s request and (2) Diane’s dating the adjusting entries December 31?
(c) Can Diane accrue revenues and defer expenses and still
be ethical?
