Effective financial reporting depends on sound ethical behavior. Financial scandals in accounting and the businesses world have resulted in legislation to ensure adequate disclosures and honesty and integrity in financial reporting. A sound economy is contingent on truthful and reliable financial reporting.
Imagine you are the assistant controller in charge of general ledger accounting at Linbarger Company. Your company has a large loan from an insurance company. The loan agreement requires that the company’s cash account balance be maintained at $200,000 or more, as reported monthly. At June 30, the cash balance is $80,000. You give this update to Lisa Infante, the financial vice president. Lisa is nervous and instructs you to keep the cash receipts book open for one additional day for purposes of the June 30 report to the insurance company. Lisa says, “If we don’t get that cash balance over $200,000, we’ll default on our loan agreement. They could close us down, put us all out of our jobs!” Lisa continues, “I talked to Oconto Distributors (one of Linbarger’s largest customers) this morning. They said they sent us a check for $150,000 yesterday. We should receive it tomorrow. If we include just that one check in our cash balance, we’ll be in the clear. It’s in the mail!”
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