Ethics: Changes in Estimate Mike Crane is an audit senior of a large public acco
ID: 2431812 • Letter: E
Question
Ethics: Changes in Estimate
Mike Crane is an audit senior of a large public accounting firm who has just been assigned to the Frost Corporation’s annual audit engagement. Frost has been a client of Crane’s firm for many years. Frost is a fast-growing business in the commercial construction industry. In reviewing the fixed asset ledger, Crane discovered a series of unusual accounting changes, in which the useful lives of assets, depreciated using the straight-line method, were substantially lowered near the midpoint of the original estimate. For example, the useful life of one dump truck was changed from 10 to 6 years during its fifth year of service. Upon further investigation, Mike was told by Kevin James, Frost’s accounting manager, “I don’t really see your problem. After all, it’s perfectly legal to change an accounting estimate. Besides, our CEO likes to see big earnings!”
Answer the following questions in the Discussion Board:
What are the ethical issues concerning Frost’s practice of changing the useful lives of fixed assets?
Who could be harmed by Frost’s unusual accounting changes?
What should Crane do in this situation?
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Accounting changes and error analysis. Intermediate accounting (16th ed.). (p. 1323). New York, NY: John Wiley & Sons, Inc.
Explanation / Answer
What are the ethical issues concerning Frost’s practice of changing the useful lives of fixed assets?
Answer:-
IAS 8, Accounting policies, changes in accounting estimates and Errors, recognises change in accounting estimate as a result of new information available to the business firm but not as a error correction. So, change of accounting estimate of depreciation expenses for fixed assets is not wrong or illegal, but at the same time it should not be made with an intention to decive users of financial statments like Creditors, Financiers, Share holders and investors etc. If the accounting estimate is chaged with an fraudlent intention it will be an unethical issue, which pulls down the business firm's fame and brand when it was identified by the auditor.
Who could be harmed by Frost’s unusual accounting changes?
Answer:-
The present change in Accounting estimate of life period of a fixed asset, will increase the amount of Depreciation expenses, as a result net profit of the business firm will decrease. Which badly effects the investors i.e shareholders who are expencting dividends, Creditors and financiers who are expecting payment of principal and interest and other stake holders who use the finanacial statments of the Frost Corporation.
What should Crane do in this situation?
Answer:-
In the present situation even though the change in estimate was found by the auditor Mike Crane, still he has to perform in depth analysis regarding whether the business firm changed its estimates according to the updated information available to them or not. A enquiry shall be done whether any suggesition was taken by some expert in the filed of Fixed asset valuation and followed it. If not on which basis they changed the accounting estimate on fixed assets shall be know. If they are unable to provided answer for the basis for change in accounting estimate on fixed assest, then auditor can suspect a doubt of intentional change in acounting estimate to decieve the stake holders of the buisiness firm, which is a fraudlent behaviour. The auditor can proceed further audit procedures in depth analysis and report the same in his audit report.
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