ETHICS in the Real World
In an article about the subjectivity involved when deciding to capitalize or expense a cost, Forbes reports:
A dollar spent on a toaster doesn”t reduce wealth in the same way as one spent on a Twinkie. One lasts, the other doesn”t. But where do toasters end and Twinkies begin in [today”s] economy? … Accountants understand the general problem, but they do not know what to do about it. Capitalizing anything that you can”t drop on your foot—software, worker training, marketing expense—can be hugely speculative. You never find out whether such things have real future value until the future arrives.
A case in point involves Fine Host Corp., which spent huge dollar amounts to obtain new food service contracts. The company listed these costs on the balance sheet and depreciated them over time. When the company was accused of aggressive accounting, the share price dropped from $12 to $3 per share. Many believed that the food service contract costs should have been accounted for “as current expenses against revenue.” Fine Host ended up restating its net income number, reducing it from $13 million to a loss of almost $18 million.
ETHICAL ISSUE Fine Host management was not convicted, or even accused, of fraud. The company just subjectively called an asset what many in the financial community considered an expense. Was it ethical for Fine Host to do so? Was management acting in the interests of the shareholders?