Accounting Information Systems: The Processes and Controls, 2nd Edition

ETHICAL ISSUES RELATED TO CONVERSION PROCESSES (STUDY OBJECTIVE 6)

Previous chapters examined ethical misconduct related to the purchasing, cash disbursement, payroll, and fixed assets processes. Many of those issues are also pertinent to the conversion system, as the relevant business activities also correspond to processes in the conversion system.

In addition, the conversion system is the target of many types of fraud schemes. Most of these involve the falsification of inventory quantities, hiding of inventory costs, or manipulation of the gross profit figure. These types of fraud schemes are generally perpetrated by management in an attempt to meet or beat earnings targets. Earnings management is the act of misstating financial information in order to improve financial statement results.

One method used by managers to increase the gross profit is to offer price discounts to customers. Although many companies offer price discounts, there may be a problem with this scenario if the intention of management is to artificially boost earnings. Sales discounts become problematic when they are offered as a coercive tactic to lure customers into making a purchase earlier than normal. Although it may be an effective way to increase sales, there are ethical implications to this practice. Customers will expect the discounted prices to be offered in the future, and the temporary increase in cash flow for the company may affect projections that are not likely to be realized.

Another earnings ...