Chapter 3, Problem 3.5SDC

Ethical Decision Making: A Mini-Case

Mike Lynch is the manager of an upstate New York regional office for an insurance company. As the regional manager, his pay package includes a base salary, commissions, and a bonus, when the region sells new policies in excess of its quota. Mike has been under enormous pressure lately, stemming largely from two factors. First, he is experiencing mounting personal debt due to a family member’s illness. Second, compounding his worries, the region’s sales of new insurance policies have dipped below the normal quota for the first time in years.

You have been working for Mike for two years, and like everyone else in the office, you consider yourself lucky to work for such a supportive boss. You also feel great sympathy for his personal problems over the last few months. In your position as accountant for the regional office, you are only too aware of the drop in new policy sales and the impact this will have on the manager’s bonus. While you are working on the year-end financial statements, Mike stops by your office.

Mike asks you to change the manner in which you have accounted for a new property insurance policy for a large local business. A check for the premium, substantial in amount, came in the mail on December 31, the last day of the reporting year. The premium covers a period beginning on January 5. You deposited the check and correctly debited Cash and credited Unearned Revenue. Mike says, “Hey, we have the money this year, so why not count the revenue this year? I never did understand why you accountants are so picky about these things anyway. I’d like you to change the way you’ve recorded the transaction. I want you to credit a revenue account. And anyway, I’ve done favors for you in the past, and I am asking for such a small thing in return.” With that, he leaves your office.

Required:

How should you handle this situation? What are the ethical implications of Mike’s request? Who are the parties who would be helped or harmed if you went along with the request? If you fail to comply with his request, how will you explain your position to him? Justify your answers in writing.