ETHICAL ISSUES RELATED TO REVENUE PROCESSES (STUDY OBJECTIVE 9)

imagesA sad fact of the business and accounting environment is that many deceptions and fraudulent acts relate to revenue measurement and recognition. Many managers or owners succumb to the temptation to inflate (overstate) revenues so that they can make the company's financial performance appear better than it is. Intentional revenue inflation is unethical, and many types of revenue inflation are illegal.

THE REAL WORLD

In the early days of personal computers, one of the manufacturers of hard drives was MiniScribe Corporation. The chief executive officer of MiniScribe, Q.T. Wiles, was convicted of fraud in 1994 and subsequently served 30 months in prison for falsifying revenue. To inflate revenues, Q.T. Wiles came up with a novel idea. He made the employees ship bricks, rather than hard drives, in boxes that were sent to distributors. The company also shipped scrapped parts in boxes that were labeled as hard drives. The company inflated revenue by recording completely fictitious, fraudulent sales of these bricks and scrap materials. In addition to the CEO being sentenced to jail time, the chief financial officer, a CPA, was disciplined by the SEC. The company ultimately failed.4

There are many examples of companies inflating revenue. The MiniScribe example points out an unfortunate truth: If top management is intent on ...

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