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The Case of Stretching the Principles of Revenue Recognition
John is CFO at a v
The Case of Stretching the Principles of Revenue Recognition
John is CFO at a venture-backed tech startup with revenues of $20 million and approximately 80 employees. He’s worked at the company for several years, and now reports to Ralph, the company’s newly hired CEO.
The company had been doing really well, but recently big customers have been placing fewer orders and Ralph is feeling pressure to show growth. This pressure is amplified because the company is venture-backed, and the investors expect results. While the company did well in the first round of funding, if they don’t perform now, they may have trouble with gaining sufficient funding in the second round, which could mean the end of the company.
All of this was on John’s mind when Ralph came to him about recording a major order that was still under negotiation. The deal had not gone through, although both parties expected to complete the deal in the next week. With the current quarter ending in the next few days, including this order would give a significant boost to the company’s financial reports. Nonetheless, under the generally accepted accounting principles (GAAP), it is clear that this order does not qualify as revenue.
Even so, Ralph was adamant about John booking the order, which could make all the difference in the company’s ability to stay afloat. John knew that doing so would constitute fraud; particularly because the Sarbanes Oxley Act requires the CEO and CFO to sign off on all quarterly reports. At the same time, John knew that this order could make all the difference.
Source:
Babb, A., 2013. Stretching the Principles of Revenue Recognition. Markulla Center for Applied Ethics [Online] available at www.scu.edu.
TASK:
Supported by appropriate theoretical considerations, critically evaluate the ethical challenges raised in this case and ethical decision-making for this company in particular and other similar companies. Conclude by stating what John should do and why.
Learning Outcomes:
1. Critically evaluate the relevance and practical application of business and professional ethics in the working world.
2. Critically evaluate various normative ethical theories and how these can be useful when examining business issues.
3. Apply an ethical decision-making framework to various practical business situations.
4. Illustrate an awareness of the impact of globalisation on business issues.
5. Recognise the importance of professional ethics and the structures in place across various professions.
All learning outcomes must be met.
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