Business ethics assignment

Midnight journal entry

Jahnvi Trada

Sybba-4

475
Midnight journal entry case:

The case is about Richard okumoto who was the chief financial officer (CFO) of electro
scientific industries, Inc.(ESI), a multi- million dollar equipment manufacturer. He was
appointed in the company just a few weeks ago.

Once he was reviewing the recent results of company he had noticed a sharp dip in accrued
liabilities between the two quarters ending May 31 and August 31 Now, looking at the
detailed journal entries his staff had provided, he noticed that several significant accounting
entries had been made around midnight on September 12, 2002. The entries made that
September evening had significantly changed the companys results for the quarter ending
August 31, 2002, a few days before they were reported to the Securities and Exchange
Commission. From the pass codes required by the accounting software, Okumoto could see
who had made the entries. They included James Dooley, and then the companys acting chief
operating officer and now the CEO, the corporate controller, and several senior members of
the finance team. One midnight journal entry in particular drew the new CFOs attention. The
late-night team had wiped out an accrued liability of $977,000 associated with the anticipated
cost of retirement and severance benefits to company employees in Japan, Korea, and
Taiwan. That entry, and several smaller ones, all of which were favourable to net income, had
the cumulative effect of permitting the company to report earnings of $0.01 per share for the
quarter ending August 31, 2002, rather than a loss.

S Okumoto learned that the company had received a legal opinion that the reversal was
improper. Consequently, he believed that companys earnings should be restated. He
recommended that the companys financial statements for the previous two quarters be
restated and that it hire an independent accounting firm to conduct an audit of the Asian
benefits issue but the audit company declined okumotos suggestion of independent
accounting firm brought in but told them to lead to investigation into the matter. When he
approached the CEO, the general counsel, and the companys outside auditors with his
concerns, however, he got the same response-the reversed accrual was not a problem, and he
should just 'get past it. Then he had to make a decision between action and inaction, because
he was surely going to be jobless if he raised his voice.

Ethical dilemma:-

1. Reversal entry of liabilities to retirement benefits

2. Cancellation of retirement allowances after announced
3. Okumoto should act against it or not?
 1) Reversal entry of liabilities to retirement benefits
They reversed the entries of 2 quarters
These entries lead to show profit from loss
They reversed the entries against the cost of retirement and severance
benefits to companys employee in Japan, Korea, and Taiwan

2) Cancellation of retirement allowance after announced

Retirement allowances were not legal requirement in Japan. However
once the company agrees to pay retirement allowances ,they are
obliged to pay them in accordance with the rules and cannot remove
them at the companys discretion
Okumoto tried many times to talk to CEO , Dooley but he became
angry

3) What should okumoto do?

If he had took some action he would be jobless
If he in acted, then his values given by his parents will ruin
He could stay without job ,because he was alone who he had to take
care of

Solution of the ethical dilemma:-

1. Reversal entry of liabilities to retirement benefits

I think this is unethical behaviour
If it is a loss then let it be as a loss, but changing it into profit and
manipulating the investors decision is unethical
They should now accept their fault and change the accounting entries

2. Cancellation of retirement allowance after announced

This is surely an unethical behaviour
First they changed the entries and after that they cancelled the benefits of
retirement and severance
It means the cost which they have shown is not executed
So they should not cancel the benefits and give away the benefits so the
employees are also happy and there is no risk of employees taking the matter
before Japanese labour board

3. What should okumoto do?

Okumoto should have raised his voice at the beginning and stop all this
He tried but , his voice was not that louder
So he should not worry about his job and behave ethically as guided by his
parents