Late one Thursday afternoon, Joy Martin, a veteran audit manager with a regional
ID: 2482635 • Letter: L
Question
Late one Thursday afternoon, Joy Martin, a veteran audit manager with a regional CPA firm, was reviewing documents for a long-time client of the firm, AMT Transport. The year-end audit was scheduled to begin Monday. For three months, the economy had been in a down cycle and the transportation industry was particularly hard hit. As a result, Joy expected AMT’s financial results would not be pleasant news to shareholders. However, what Joy saw in the preliminary statements made her sigh aloud. Results were much worse than she feared.
“Larry (the company president) already is in the doghouse with shareholders,” Joy thought to herself. “When they see these numbers, they’ll hang him out to dry.”
“I wonder if he’s considered some strategic accounting changes,” she thought, after reflecting on the situation. “The bad news could be softened quite a bit by changing inventory methods from LIFO to FIFO or reconsidering some of the estimates used in other areas.”
Required:
1. How would the actions contemplated contribute toward “softening” the bad news?
2. Do you perceive an ethical dilemma? What would be the likely impact of following up on Joy’s thoughts? Who would benefit? Who would be injured?
Explanation / Answer
1. By changing of the accounting method the losses may be decreased. Hence this would soften the bad news.
2. Ethical dilemma exists in the situation. Changing of accounting methods merely to present better picture is incorrect.
The likely thought would be whether to make changes in accounting practise or act ethically and present the true picture
The management would benefit as there position would be saved.
The shareholders would suffer as the correct results would not be present
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