Reference no: EM131379976

Joe Kang is an audit partner for Lee & Han, LLC. Joe is a CPA in the state of Florida and a member of the AICPA. He recently met with Kate Boller, the CFO of Frost Systems, an audit client of the firm, about the market value of their inventory. Joe told Boller that a write-down of 50 percent had to be made because the net realizable value of the inventory was 50 percent less than the original cost recorded on its books. That meant the earnings for the year would be reduced by $10 million and the client would show a $2 million loss for fiscal year 2013 rather than the current $8 million profit.

In a heated exchange with Boller, Joe was instructed not to record any write-down for the year and to wait until 2014 to see if, in fact, the value of the inventory was 50 percent of its cost. Boller argued that the demand for the inventory would pick up next year because the economy in Florida was finally recovering from the recession of 2007-2008. Boller told Joe that her boss, Judy Preston, the CEO, had given the order not to write down the inventory.

Joe was told to submit the final financial statements to Boller by the end of the week because the company was going to use the statements to support a $20 million loan for market expansion. Joe spent the next few hours thinking about the situation. He was under a great deal of pressure from firm management to grow the business. Joe knew he would never advance from his junior partner status unless he maintained the current clients under his control and brought in new business. Joe worried what might happen if he took a tough position with Boller and Frost Systems and insisted on the write down.

What Joe did next troubled him deeply but he felt there was no other option for him short of jeopardizing the relationship he had built over many years with one of the largest clients in the West Palm Beach office of the firm. Joe contacted Barbara Simon, the audit manager on the engagement who is a CPA, and instructed Barbara to change the audit work papers to not reflect a market decline in the value of inventory. Barbara was shocked by the request as she always thought of Joe as an honest professional.

Even after Joe explained his reasons, Barbara said she did not feel comfortable making the change. In the end, Joe ordered her to change the work papers or he would see to it that she received a bad performance review and it would negatively affect her future with the firm.

Questions

1. Evaluate Joe's actions and motives using ethical reasoning and with reference to the AICPA Code of Professional Conduct.

2. Evaluate Joe's actions from a cognitive development perspective.

3. What would you do if you were in Barbara's position? Use ethical reasoning to support your action including your responsibilities as an accounting professional.

4. Assume Barbara speaks to the managing partner of the firm about the inventory matter and she tells Barbara to forget about it and just be a team player in this instance. Does Barbara have any whistleblowing obligations at this point? What ethical issues should be of concern to Barbara in deciding whether to blow the whistle on Frost Systems and the accounting firm?