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