PHIL 106 Business Ethics

What is the effect of this transaction on this year and next year income statement and income tax expense? Why?

If R. J. Graziano Wholesale had been using the FIFO method of inventory costing, would the president give the same directive?

Should the plant accountant order the inventory purchase to lower income? What are the ethical implications of this order?

Which Code of Conduct principle would you act on from the professional codes of conduct guiding ethical behavior in this field (Provide the name of the organization, and the code of conduct that pertains to why you act, and then provide the URL for your source)?

Based on your chosen code of conduct principle(s), what would you do (step-by-step) in order to act in accordance with your chosen principle to address this situation?

In this essay, an attempt is made to discuss the role of ethics in accounting and business. In this case, R.J. Graziano Wholesale Corporation has decided to take the advantage of changing income tax rate that is scheduled to decline next year. The company has decided to purchase large stock at higher at the end of the year for taking the advantage of the changing tax rate. This transaction has impact in the current year and the next year’s profit and income tax expenses. The company currently follows a LIFO method of inventory accounting. In LIFO method the stock that are purchased at last are issued first. Therefore, by purchasing inventory at higher price during the end of the year the company could increase the cost of production and reduce profit for the current year. The current income tax rate is high so the reduction in profit will help the company to reduce the income tax expenses of the current year.  The price of the inventory has doubled during the year so in the subsequent year the profit of the company will increase as the company follows LIFO method of inventory costing.  The company tax rate will reduce in the next year so the income tax expenses of the company will reduce. Therefore, it can be said that this transaction will help the company reduce income tax expenses by diminishing the current year profit and increasing the profit of the subsequent year (Smith 2014).

The FIFO method of inventory costing provides that the stock that have been purchased earlier will have to be issued first. This means that if the company decides to purchase inventory at higher price at the end of the year this will result in increase in closing stock during the current year. The increase in closing stock will further increase profit and as a result, the income tax expense of the company will increase. Therefore, it can be said that if the company followed the FIFO method of inventory costing then the president will not give the same direction (Zadek et al., 2013).

The president of the company has instructed the plant accountant to recommend the purchase of inventory at the end of the financial year. The plant accountant should not order the purchase of inventory to lower the income because there are ethical implication for these decisions. It is the ethical and legal responsibility of the business to pay taxes on the income earned. The company has the right to reduce the tax obligation by making proper tax planning (Bowser et al., 2017). However, the decision to purchase inventory in order to reduce tax obligation and take advantage of reduction in tax rate is ethically incorrect.  Therefor it can be said that the decision to order inventory at the end of the year is unethical.

  The principle of professional code of conduct that an accountant needs to comply are responsibility principle, the public interest principle, integrity principle, due care principle, scope of service principle and objectivity principle. In this case, the instruction given by the president to plant accountant for purchase stock at the end of the year violates the principle code of conduct of objectivity and independence. Therefore, the plant accountant should conduct in accordance with the guiding principle of objectivity and independence (aicpa.org, 2017).

The plant accountant should maintain its professional code of conduct of objectivity and independence. The professional can maintain objectivity and independence if the function can be discharged free from conflict of interest and interference. There are certain steps that plant accountant should take in order to perform its function objectively and independently. The first step that should be taken is to evaluate the suggestion provided by the president. If the suggestion is suitable then it should be accepted otherwise the suggestion should be rejected.  If it is forced to accept the decision of the senior management then the second step is to assess the professional code of conduct that the decision violates. The third step is to take appropriate steps to inform the senior management that the decision violates the professional code of conduct. The fourth step is that if the company takes no action to mitigate the unethical behavior then in such case the plant account should leave the engagement.   

References

Bowser, A., Shilton, K., Preece, J., & Warrick, E. (2017, February). Accounting for privacy in citizen science: Ethical research in a context of openness. In Proceedings of the 2017 ACM Conference on Computer Supported Cooperative Work and Social Computing (pp. 2124-2136). ACM.

http://www.aicpa.org/Research/Standards/CodeofConduct/DownloadableDocuments/2014December15ContentAsof2016August31CodeofConduct.pdf

Smith, M. (2014). Research methods in accounting. Sage.

Zadek, S., Evans, R., & Pruzan, P. (2013). Building corporate accountability: Emerging practice in social and ethical accounting and auditing. Routledge.