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Legality and Ethicality of Financial Reporting

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Pages 5
Legality and Ethicality of Financial Reporting

Janet Tran


Kathrine Parks

University of Phoenix/Axia

July 21, 2014

Excello Telecommunications was presented with a dilemma on how the company should report earnings so that they would appear to have met earning estimates for the 2010 financial year. The CFO, Terry Reed, was concerned with how failure to meet earning estimates would affect bonuses, stock options, and the share price of Excello stock. On December 201, 2010, the company sold $1.2 million of equipment to Data Equipment Systems. However, Data Equipment Systems requested that Excello hold on to the product until January 11, 2011, because they do not have the capacity to hold the product until then. This means the $1.2 million sale cannot be recorded until Data Equipment Systems receives the product, which would be in the next financial year. The accounting team came up with three scenarios on how to creatively report this $1.2 million in sales for 2010 financial reports. This paper will examine the legal aspects, the financial standards involved, and ethicality of the Excello Telecommunications case. In this case, legally the company must adhere to many accounting laws and regulations. One of the laws called Sarbanes-Oxley Act of 2002 (SOX) would have a huge impact and influence in this case. SOX was created to restructure and further explain the role of corporate governance in corporate America, strengthen controls over financial reporting, and put more accountability on high ranking executives in the company. Terry Reed wanted to manipulate when this $1.2 million sale is reported to help benefit the company and its shareholders. This action could potentially violate a few provisions of SOX. Provisions that would be violated by unethical reporting in this case would be Sections 302 and...

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