Reference no: EM133088193

Question - After graduating near the top of his class, Anton Boussard was hired by the local office of a Big 4 CPA firm in his hometown. Two years later, impressed with his technical skills and experience, Rollins Mechanics, a large regional consumer electronics chain, hired Anton as assistant controller. This was last week. Now Anton's initial excitement has turned to distress.

The cause of Anton's distress is the set of financial statements he's stared at for the last four hours. For some time prior to his recruitment, he had been aware of the long trend of moderate profitability of his new employer. The reports on his desk confirm the slight, but steady, improvements in net income in recent years. The trend he was just now becoming aware of, though, was the decline in cash flows from operations.

Anton had sketched out the following comparison ($ in millions):

Profits? Yes. Increasing profits? Yes. The cause of his distress? The ominous trend in cash flow which is consistently lower than net income.

Upon closer review, Anton noticed three events in the last two years that, unfortunately, seemed related:

1. Rollin's credit policy had been loosened; credit terms were relaxed and payment periods were lengthened.

2. Accounts receivable balances had increased dramatically.

3. Several of the company's compensation arrangements, including that of the controller and the company president, were based on reported net income.

Required -

1. What is so ominous about the combination of events Anton sees?

2. Do you perceive an ethical dilemma? If you do, describe the dilemma. If not, why not?

3. What position, department, or outside parties would be affected by this situation?

4. What course of action, if any, should Anton take?

5. Are there any citations in the FASB Codifications that could support your position?