Q1EI_2 - Horngren'S Financial And Managerial Accounting

Question

As a result of the recent mortgage crisis, many banks reported record losses to their mortgage receivables and other assets based on the decline in these assets’ fair values. 

Requirements  

If a business chooses not to report these losses, is there an ethical issue involved? Who is hurt?

Step-by-Step Solution

Answer

Answer

Yes, non-reporting of losses in the same year will lead to ethical issues, and bank stakeholders will get hurt.

Step-By-Step Solution

Step 1: Definition of Misrepresentation

Misrepresentation can be defined as the unfair practice of representing false information on the financial statement of the business entity.

Step 2: Ethical Issues Involved

Non-reporting of the losses in the same year will be included in the unfair practices because it will overstate the bank’s assets and income. Due to overstatement of the assets and income, financial statements will be misrepresented. 

Due to such misrepresentation, stakeholders will get hurt because they will arrive at the wrong investment decision.