When it comes to case study 10-7 (“Ethics and Construction Costs”)
my reply to the CEO would be that what he is asking me is not only
unethical, but it goes against GAAP standards as well. The first
concern for me would be the CEO insinuating that the company
could capitalize on interest from the planning period that started in
2015. However, the construction of the building did not start until
June 2016. As stated in our textbook “The capitalization period
begins when (1) expenditures for the asset have begun, (2) activities
that are necessary to get the asset ready for its intended use are in
progress, and (3) interest cost is being incurred. Interest
capitalization continues as long as the three conditions are present.”
(Wahlen, 2017). This clearly shows that during the planning stage
there is no interest to be capitalized, and the capitalization is not to
begin until the building construction is in progress.
The next issue is when the CEO asked me to increase the overhead
by adding 1/12 of my salary to the cost of the building to increase
the profit for the year. Wahlen also states in our textbook that
interest is to be capitalized in the event that the cost could have
been avoided if the construction had not happened. In this case, I
have a salary, therefore this cost could not have been avoided
because it would have been the same whether there was
construction of the building or not. Again, this is not only unethical
but fraudulent due to falsifying the financial statement.
Clearly, the CEO knows what he is asking of me, as he asks “You get
the idea?”. This CEO is asking me to go against many GAAP
principles. These include but are not limited to Principle of
Regularity, Principle of Sincerity, Principle of Utmost Good Faith,
Principle of Non-Compensation, etc. In regards to this, I would for
one not adhere to the CEO’s request. I would also report these
unethical circumstances to the FASB and SEC. I’m sure this is not the
first time the CEO has made requests of this nature, and it will not be
the last. I would also contact the ethics hotline (Principal, 2022), to
report the fraud and unethical reporting the CEO tried to have me
act on.
Reference
Report fraud or unethical conduct. Principal. (n.d.). Retrieved March
10, 2022,
