REWRITE IN YOUR OWN WORDS

Do you believe Gallant's actions are ethical? Why or why not?

The decision to postpone expenditure is questionable. It is one thing to postpone spending due to a cash bind and it is quite another to wait for expenditure to hit a profit target. Delaying these expenditures may have the effect of ultimately increasing future costs and reducing future profits. If orders to the companys suppliers are changed, it may disrupt their operations. The additional fees may be passed on to Gallants company and may create ill will and a feeling of mistrust. Postponing maintenance on equipment is particularly questionable. The result may be breakdowns, inefficient and/or unsafe operations, and a shortened life for the machinery.

Gallants decision to reclassify period costs is unethical assuming that there is no intention of disclosing such reclassification in the financial reports. This violates the principle of consistency in financial reporting and is an apparent attempt to mislead the users of such financial statements.

Even though some may argue that the general effect of Gallants action will be a wash, that is, profits for the current period will just be taken to the next period. Here, the trend of earnings will be affected. Expectantly, the auditors would detect such an attempt at manipulation of the annual earnings and would in effect decline to issue an unqualified opinion due to the lack of consistency. However, recent accounting scandals may lead to some skepticism about how strong auditors have been in enforcing tight accounting standards.