You and Stefanie, both of whom are CPAs, members of the AICPA, and the assistant

Question

You and Stefanie, both of whom are CPAs, members of the AICPA, and the assistant controller and the controller, respectively, of the Logan Company, a small publicly-held manufacturing company, are discussing the financial close process for the current year. Stefanie has just returned from lunch with Brandon, the president and CEO of the company. Brandon suggested that Stefanie could be a good friend and a very practical executive by doing her part to increase income for the year. Brandon has just agreed to purchase a new yacht, and he is relying on his bonus to be able to make the down payment on it. If Stefanie could make sure that net income increased by at least ten percent this year, Brandon would receive a substantial bonus and be able to make the down payment. Brandon suggested that Stefanie could aggressively record revenues at year end and delay recording as many expenses as possible. Brandon also said he doubted the auditors would find this, and even if they did, they could be persuaded to "waive" any adjustments as being immaterial. Currently, it appears as though net income will increase by about six percent for the year. Stefanie is a single mom with two kids, 11 and 9 years old, to support. Your wife is a full-time mother to your four kids, ages 16, 12, 8, and 4, as well as helping to take care of your parents who are in their mid-80s.

Required

1. What is the ethical dilemma Stefanie faces in this situation?

2. Identify the parties who would be affected by a decision to increase net income in the manner Brandon suggested. Who benefits? Who is harmed?

3. What alternatives are available to Stefanie?

4. What does Stefanie stand to gain by complying with Brandon's request? What does she stand to lose?

5. What advice would you give to Stefanie?

6. What would you do if she rejects your advice?

Explanation / Answer

1. The ethical dilemma faced by Stefanie is whether collude with Brandon and do the unethical thing of inflating sales and reducing expense to show a wrong finacial result and keep her position in the company intact , or as an ethical CPA , she should oppose the proposal and refuse to do any financial misstatement and face the consequences.

2. The only beneficiary by increasing net income artificially is Brandon. The stakeholders of the company as a whole , the sharholders , the creditors and the employees of the company , including Brandon may be harmed as the financial fraud may get exposed and there will be strict action on the company by SEC, the valuation will get a hit and the life of employees become uncertain.

3. Alternative to Stefanie are ;

a. Convince Brandon about the danger of the proposed financial fraud and the consequences which may be huge as copmared to the benefit Brandon will get. Ig Brandon gets convinced , well and good.

b. If Brandon does not agree , Stefanie may either comply with his proposal ,or,

c. refuse to comply with his proposal and report the matter to the Audit Committee.

4. If Stefanie complies with Brandon's proposal , she will be able to keep her position of Controller safe and may expect better financial compensation and bonus for being in good book of Brandon.

However, Stefanie will lose a lot by complying with Brandon's request. Firstly she becomes unethical from the viewpoint of a CPA by willing doing misstatement of financial information. As there is high chance that the fraud will be exposed some day, there will be strict action against the company and specially on the controller. Professionally also she might be punished for not maintaing ethicl standards. There is a high chance that her professional career will be at stake with such willful misstatement.

5. I would advice Stefanie to try to convince Brandon not do such willful misstatements. If he does not agree , she should oppose it and inform to the Audit Committee. If there is retaliatory measure from Brandon, she may leave the position with a detailed report to the Audit Committe and the BOD.

6. If Stefanie rejects my advice , as a proessional CPA , I need to take an ethical ground and act as a whistleblower and report the matter to the Audit Committee . I must be ready to face the consequences to stand for the ethical ground.

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