Professional Ethics – A Case Study for CPAs in Business
CPAs in business have unique threats to ethical compliance. Many times, these threats come from their employer. This makes for a challenging environment when confronting a superior over an ethical quandary as it could result in the dismissal of the CPA from his/her employment or result in the CPA resigning from his/her employment. Maintaining professional ethics can be difficult. While the loss of a client is important to the CPA in public practice, the loss of the sole source of income of the CPA in business is much more frightening and impactful. This makes compliance with professional ethical standards challenging in difficult situations. In some situations, it can be a choice between ethics and providing for your family.
Therefore, being reminding of the compliance threats and compliance obligations is of utmost importance to the CPA in business. In using case studies, some cases provide a clear answer. Stealing is wrong…Period. However, there are many situations where the answer is not as clear. These situations present a quandary which must be resolved.
One such case study follows.
As the controller of a small distributor and a CPA, you are closing the books for the year. The owner, who is well past retirement age, has announced that a buyer for the business has been secured. Once the sale transaction has been completed, the members of senior management, including you, the controller, will receive a significant bonus. This bonus will be the equivalent of 150% of one year’s salary.
While reviewing the balance sheet, you notice that there are a number of expensive inventory items that are aged. Usually, inventory turns about once every 90 days, and these have been on the books for almost a year.
You approach the VP of Operations with your concern. He tells you that a competitor had devised a better product at a much lower cost. This product was unsaleable at any price. However, due to the cost of this product, writing it off would be a material adjustment and would certainly impact the purchase price and may put the entire sale in jeopardy. He says that it would be in everyone’s best interest to ignore it. “The buyer did their due diligence. If they missed it, it’s their problem, not ours.”
You bring the situation up to the owner. He says, “Don’t screw this up. I’ve worked a lifetime for this deal and I’m paying you a lot of money to make it happen.”
You know that everyone will be upset if the sale is not consummated or the bonus amount is reduced. Personally, you want the bonus. While you can always find another job, the bonus will buy a new car and pay off your student loans. But, you also know that the inventory is not properly stated and this will be determined at some point in time. You can always say that you just missed it. After all, you’re just the controller, not an operations guy.
What should the controller do?
Ethical Core Foundations to consider
Integrity and objectivity – These core foundations require the CPA to be honest, unbiased, not be influenced by personal prejudices and not subordinate judgment to personal gain. This case presents what is right – to value the inventory properly by writing it off or using a valuation allowance, versus ignoring the facts, as discovered, for personal gain.
Due care – Requires that the standards of the accounting profession are upheld at all times. Ignoring a known fact does not uphold the standards of the profession.
Threats to Ethical Behavior
The threats in this case are self-interest, undue influence and advocacy. The self-interest threat manifests itself in the desire to obtain the promised bonus. It is a significant amount of money. Undue influence come into play in the form of implied or actual coercion from the owner and company officers. They also have a significant stake in the success of the transaction. Their self-interest may result in coercing you.
Since there are no company safeguards noted in this case, the only possible safeguards are those created by the profession. A company safeguard would be a board of directors with whom a concern may be shared or an audit committee. The owner of the company has already made his wishes known. The only safeguard in this instance is your training in ethical behavior.
Code of Professional Conduct Rules
The AICPA Code of Professional Conduct addresses Integrity and Objectivity, stating that a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others. The Code also requires the general standard of Due Professional Care which requires that the CPA use reasonable care and diligence in the performance of work. The Accounting Principles Rule would also require that inventory be properly valued in accordance with GAAP. Lastly, negligence in the preparation of financial statements and records is an Act Discreditable.
Example Thought Process
It is pretty clear that knowing there is an inventory issue and not recording the appropriate adjustment violates the core foundations of the CPA profession as well as many specific rules applicable to the CPA in business. You can try to tell yourself that you can plead ignorance. However, that would not be ethical. In this case, the ethical path would be to insist that the inventory adjustment be made. If this is refused, then you should disassociate yourself from this entity. While a big bonus sounds very nice, the money is fleeting. Discovery of unethical behavior can ruin your entire career.
For a variety of cases discussing the ethical obligations of the CPA in business, take a look at some of our interesting ethics courses.