Wrestling with Your Conscience and GAAP
Response to the following problem:
You are the controller for South Valley Industries. Your assistant has just completed the financial statements for the current year and has given them to you for review. A copy of the statements also has been given to the president of the company. The income statement reports net income for the year of $50,000 and earnings per share of $2.50.
In reviewing the statements, you realize the assistant neglected to record adjusting entries. After making the necessary adjustments, the company shows a net loss of $10,000. The difference is due to an unusually large amount of unrecorded expenses at year-end. You realize that these expenses are not likely to be found by the independent auditors.
You wonder if it would be better to delay the recording of the expenses until the first part of the subsequent year in order to avoid reporting a net loss on the income statement for the current year. A significant increase in revenues is expected in the coming year, and the expenses in question could be "absorbed" by the higher revenues.
What issues are involved in this case? What course of action would you take?