As the controller of Select Cleaning Services, you discover a significant error in the previous year's financial statements. Two journal entries for services provided on account were recognized in the previous fiscal year but should have been recognized this fiscal year. The incorrect financial statements were issued to banks and other creditors less than a month ago. After much thought about the consequences of telling the president, Eddy Lieman, about this misstatement, you gather your courage to inform him. Eddy says, "Hey! What they don't know won't hurt them. We have earned that revenue by now so it doesn't really matter when it was recorded. We can afford to have lower revenues this year than last year anyway! Just don't make that kind of mistake again."
Instructions
(a) Assuming the error is not corrected, how, if at all, does this error affect last year-end's balance sheet and current ratio? This year-end's balance sheet and current ratio?
(b) Who are the stakeholders in this situation and what are the ethical issues?
(c) As the controller, what would you do in this situation?