Write a 1,200- to 1,500-word paper explaining the legal aspects, financial standards involved, and ethicality of the Excello Telecommunications case. Your paper should include the following:
· Identify the legal issues involved-consider state and federal laws-and explain how they apply to the case.
· Determine the criteria by which Sarbanes-Oxley would apply to this case.
· Identify the specific financial reporting standards involved and explain how those standards were violated.
· Evaluate the financial reporting activity in terms of the AICPA Code of Professional Conduct.
· Determine the ethicality of the events within the case.
· Select the best alternative offered by the team. Defend your decision in terms of its legality, ethicality, and alignment with accounting standards.
Excello Telecommunications has been profitable for many years but recently has been faced with increased competition for its products by overseas manufacturers. For the first time in the company's history, it appears that earnings estimates will not be met. Top management is concerned about the effect on bonuses, stock options, and the share price of Excello stock. That is when Terry Reed, the CFO, learns of a transaction on December 20, 2010, that might solve the problem. On December 20, 2010, Excello sold $1.2 million of equipment to Data Equipment Systems. Typically, this type of transaction would be recorded as a sale on the date of shipment. However, the customer requested that Excello hold on to the product until January 11, 2011, because Data Equipment lacked the warehouse capacity to hold the product until then.
On December 30, Reed approaches the controller, Marty Fuller, to discuss the dilemma. Fuller explains the rules in accounting for sales where the goods are held for future delivery. Reed understands the rules, but tells Fuller he needs to come up with a creative way around the rules so that the $1.2 million can be recorded as revenue in 2010.
Fuller calls a meeting of the accounting department to discuss what can be done. He emphasizes two important points. First, the $1.2 million must be recorded in 2010. Second, whatever is decided it must be defensible from a GAAP point of view. The team comes up with the following alternatives:
1. Transfer the product to an off-site warehouse owned by Excello by December 31 and holds it until January 11 when it would be shipped to Data Equipment.
2. Transfer the product to Data Equipment by December 31 and agree that the customer could return it for a full refund after it arrives at Data Equipment's warehouse.
3. Offer Data Equipment a 10 percent discount to take the product by December 31.