ound 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 Mr Smith’s mind when Mr Raphael 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, Mr Raphael was adamant about Mr Smith booking the order, which could make all the difference in the company's ability to stay afloat. Mr Smith 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, Mr Smith knew that this order could make all the difference. What should Mr Smith do? Elaborate your answer.
Mr Smith is CFO at a venture-backed tech start-up with revenues of $20 million and approximately
80 employees. He has worked at the company for several years, and now reports to Mr Raphael,
the company's newly hired CEO.
The company had been doing really well, but recently big customers have been placing fewer
orders and Mr Raphael 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 Mr Smith’s mind when Mr Raphael 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, Mr Raphael was adamant about Mr Smith booking the order, which could make all the
difference in the company's ability to stay afloat. Mr Smith 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, Mr Smith knew that this order could make all the difference.
What should Mr Smith do? Elaborate your answer.
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