Russell Company’s Fraud and Ethical Analysis


Russell Company is altering the manufactured products’ line, with the old ones having been outlawed. The alteration causes a drop in sales and profits, which is deemed temporary. Out of fear of a takeover, the president pressures to accrue all possible revenues and defer all possible expenses to prevent the stock prices from plummeting. The controller complies and back-dates some of the adjusting entries to meet the request. This solution is both illegal and unethical as it would deliberately misrepresent the company’s financial state, which is considered revenue recognition fraud. The IRS or accountants may uncover this fraud.


The first stakeholder category in this situation is business owners, who are afraid to lose their share and value to a hostile takeover as a result of Russell Company’s (RS) stock price drop. RS’s management is making accounting decisions, which creates a second stakeholder. Further, if the takeover were to happen, it may have detrimental effects on RS management since it would be replaced (Kinsella, 2017). Moreover, employee turnover is typical following the leadership change, adding another secondary stakeholder as people are interested in keeping their jobs (Kinsella, 2017). Lastly, anyone who is interested in taking the controlling interest may be considered an external stakeholder – most likely, such potential acquirers or bidders will be larger companies (Kinsella, 2017).

President’s Request: Ethics

There are several ethical considerations to the company president asking the controller (Zoe) to re-evaluate this period’s year-end adjusting entries. First, he places the responsibility to resolve a company-wide issue on a single employee rather than considering alternative hostile takeover defenses. Second, the president is pressuring the subordinate to violate the code of ethics by providing unreliable and inaccurate financial reporting. Thus, the president is ethically responsible for the unprofessional approach and lackluster search for alternatives. Moreover, not disclosing factual information by deferring expenses and presenting accrued revenues causes deliberately misleading readers and violates accounting practices.

Adjusting Entries: Ethics

By choosing to comply with the president’s request, Zoe is in violation of the ethics code as well since she, as a controller, must abide by the ethics code of accounting. However, it is essential to acknowledge the power dynamics in this situation and note that Zoe could risk her employment in the event of a refusal. Hence, she is responsible for participating in the deliberate misleading. Further, adjusting entries are made only at the end of the accounting period and only for the appropriate time frame (Weygandt et al., 2020). Hence, by back-dating the adjusting entries (December 31st instead of January 17th), Zoe has explicitly and deliberately violated the ethics code by artificially inflating the company’s revenues and taking them from a different calendar year.

Revenues and Expenses


As the company operates under accrual-basis accounting, the transactions are documented in the same periods in which they have occurred (Weygandt et al., 2020). Hence, to be ethical, Zoe should have first avoided January adjustments and only recorded what occurred by December’s end. Theoretically, to stay within the ethical framework, she could have only accrued revenues that the company received through that time period. However, ultimately, adjusting entries should not be done to misrepresent or hide anything but to correct the procedural over-or under-estimates. Overall, Zoe is very unlikely to be able to perform this task and stay ethical.


Under the IFRS and GAAP, adjusting entries should ensure that revenue and expense recognition principles are not violated (Weygandt et al., 2020). The companies must ensure that the transactions that impact the company’s financial statements are recorded in the same period as when events occur (Weygandt et al., 2020). Moreover, the balance sheet should provide a fair representation of what a business owes and with the revenue recognized only when the action is performed (Weygandt et al., 2020). Deliberately misrepresenting revenue is considered fraud under US financial reporting laws (Weygandt et al., 2020). If substantial financial obligations are not reported or revenues are overreported, Russell Company’s net worth will be overstated, and it will be found in violation of the law.


There are various ways in which the scheme that the president of Russell Company suggested may be discovered. First, fraud may be uncovered when the financial statements are reviewed by a certified practicing accountant (CPA) (Weygandt et al., 2020). Further, an Internal Revenue Service (IRS) auditor may discover the accrued revenues and deferred expenses in the process of reviewing Russell Company’s accounting books. Lastly, the stockholders or an auditor may notice the disparity in the financial statements. In any of these scenarios, auditors are required to reasonably assure that “the financial statements are free of material misstatements” (Booker & Zhang, 2018, para. 1). Hence, even a suspicion may lead to a report to the Securities and Exchange Commission (SEC), which can then investigate the statements.


Adjusting entries for accruing revenues and deferring expenses is done when there is a factual estimate correction to be made, not when there is information to hide. In doing so, the actions of both the company president and the controller were profoundly unethical and illegal. The significant issues are artificially inflating the company’s revenue by recording future sales and underrepresenting the current expenses by deferring them by adjusting entries from a different period. These actions constitute revenue recognition fraud and are in violation of US law. Lastly, this fraud may be uncovered in the process of reviewing the financial statements by the IRS, the accountants, or the shareholders.


Booker, Q., & Zhang, X. (2018). Clarifying Auditors’ Responsibility for Fraud. The CPA Journal, 3. Web.

Kinsella, M. (2017). Hostile Takeovers—An Analysis Through Just War Theory. Journal of Business Ethics, 146(4), 771–786. Web.

Weygandt, J. J., Kimmel, P. D., & Mitchell, J. E. (2020). Accounting principles (14th ed.). John Wiley & Sons, Inc.

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