- 5 Marks
Question
Dahn is a Chartered Accountant who works for a large Pharmaceutical Company, Nimely Company Ltd (Nimely), as an Assistant Financial Controller. The Financial Controller of Nimely is also a Chartered Accountant with more than ten years of experience.
During the year, Nimely received a vehicle worth GH¢800,000 from the government to support its operations. According to the Government Official who presented the vehicle to the management of Nimely, the company has been compliant in filing and paying its taxes.
At the year-end, the Financial Controller passed the following entry in the Tally Software of Nimely Company Ltd:
| Dr | Vehicle | GH¢800,000 |
|---|---|---|
| Cr | Income | GH¢800,000 |
Dahn explained to the Financial Controller that the grant should be treated in line with the provisions of IAS 20: Accounting for Government Grants and Disclosure of Government Assistance. It is the company’s policy that such grants should be treated as deferred income.
The Financial Controller agreed that the treatment should have been in line with IAS 20, but mentioned that the entries should not be changed since the current treatment may help them meet their profit targets.
It is Nimely’s policy to depreciate its vehicles at a rate of 25% per annum on a straight-line basis.
Required:
i) Identify the ethical issues involved.
ii) Recommend the appropriate actions to be taken by Dahn.
Answer
(i) Ethical Issues Involved:
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Violation of Professional Integrity – The Financial Controller knowingly misclassified the grant to artificially inflate profits, violating the fundamental principle of integrity under the IESBA Code of Ethics.
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Non-Compliance with IAS 20 (Accounting for Government Grants) – The correct accounting treatment should have been to defer and recognize the grant as income over the useful life of the asset, rather than recognizing it as immediate income.
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Misleading Financial Statements – Recognizing the full GH¢800,000 as income overstates profits, potentially misleading shareholders, tax authorities, and regulators.
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Pressure to Compromise Ethics – The Financial Controller is pressuring Dahn to ignore correct accounting treatment for the sake of meeting profit targets, which is an unethical practice.
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Conflict with Company Accounting Policies – The company’s stated policy is to treat such grants as deferred income, yet the Financial Controller is overriding this for short-term financial gain.
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Potential Legal Consequences – If external auditors or regulators discover the misstatement, the company could face fines, restatements, or reputational damage.
(ii) Recommended Actions for Dahn:
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Persuade the Financial Controller – Dahn should arrange a private meeting with the Financial Controller and remind them of their duty to uphold professional ethics and compliance with IAS 20.
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Escalate the Matter – If the Financial Controller refuses to correct the error, Dahn should report the issue to the Audit Committee or higher management within the company.
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Document the Discussions – Dahn should keep a written record of his discussions with the Financial Controller to protect himself from any future consequences.
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Seek Guidance from ICAG or External Auditors – If internal escalation does not resolve the issue, Dahn should seek professional guidance from ICAG’s ethics board or consult with external auditors.
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Consider Whistleblowing Procedures – If the company does not act, Dahn may have to use the company’s whistleblowing mechanisms to report the unethical accounting treatment.
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Resign as a Last Resort – If all efforts fail and the company persists in unethical practices, Dahn may consider resigning to maintain his professional integrity.
- Tags: Ethics, Financial Integrity, Government Grants, IAS 20, Professional Conduct
- Level: Level 2
- Topic: Professional and Ethical Issues in Financial Reporting
- Series: Nov 2024
- Uploader: Salamat Hamid