Accounting Ethical Case

The capital and operating leases have got an important influence on the organization’s balance sheet. As an operating lease is considered to be the company’s regular expense. These incude renting as well as is excluded from the final balance sheet. Although, a capital lease is thought of by an organization as an asset and is inserted into the organization’s balance sheet. On the other hand, the operating lease that is used by serves to cover up the organization’s real financial strength. As the company won’t include the lease details into the financial statements. That is why the organization can be considered to have less obligations since the liability is not incorporated within its obligation with the company having a wider role in determining its profitability. The CFO has a suggestion that the company needs to be seen as earning more profits through lease instead of purchase instead of the purchase at relatively lesser cost. In the context of the Andarex, Inc. the financial obligations of the company may not be fully disclosed to the stakeholders of the company.

Question two

The outside parties that are likely to be impacted by the CFO decision are the shareholders and the government. The shareholders are set to get a false interpretation of the financial position of the company. Notably, the shareholders, particularly the potential shareholders may buy more shares from the company in expectation of fair returns yet the company finances some financial obligations that may mislead them. Additionally, the company excluding the machine from the list of their assets may further enable them to present a false financial condition of the company leading to a lesser tax obligation being presented to the company.

Question three

The assessment of the fact pattern indicates presents that the accounting manager and the CFO are in limbo on whether to categorize the machine as an operating or capital lease. Second, the accounting department is right in establishing that the machine needs to be a capital lease owing to longer use of the machine that reduces its life value. the level of responsibility rests more on the accounting department rather than the CFO since the accounting department plays the role of developing the financial statements and books of account of the company. The intention of the CFO is to manipulate the financial records of the company and further view the company as being more profitable.

The regulatory requirements are pegged on the U.S GAAP codification of accounting standards. According to the GAAP rule relevant to the case, a leased property is recognizing as an asset by the lessee if the ownership is transferred at the close of the lease term, if the lease has an option of purchase the machine below its fair value and if the lease term is equal to or exceeds 75% of economic life of the leased machine. The economic life of the machine that is under investigation exceeds 80% of its economic life, thus, calling for its categorization as a capital lease rather than an operating lease. The ethical dilemma question goes, Should the accounting manager contravene the GAAP rules that clearly points to the machine being a capital lease and align with the decision of the CFO to manipulate the financial strength of Andarex, Inc. As an action plan, the accounting manager needs to further discuss the implication of disobeying the GAAP rules in the operations of the business and fines that could be incurred.