Reference no: EM132480832
Point 1: Frank Dorrance, a senior audit manager for Bright and Lorren, a public accounting firm, has recently been informed that the firm hopes to promote him to partner within the next year or two. Frank has recently been assigned to the audit of Machine International Corp., a large wholesale company that ships goods throughout the world. It is one of Bright and Lorren's biggest clients. During the audit, Frank determines that Machine International Corp. uses a method of revenue recognition called "bill and hold," which has been questioned by the Ontario Securities Commission (OSC) as not meeting the realization principle and overstates revenue. After considerable research, Frank concludes that the method of revenue recognition is not appropriate for Machine International Corp.
Point 2: Frank discussed the matter with the partner in charge of the audit, Maria, who said that that the accounting method has been used for more than 10 years by the client. Also the client is not a public company and does not fall under the jurisdiction of the OSC. Maria is certain the firm would lose the client if they insist that the revenue recognition method be changed. Frank argues that the revenue recognition method may be appropriate in previous years but that the OSC ruling makes it not acceptable in the current year.
Point 3: Frank recognizes the partner's responsibility to make the final decision, but he feels strongly that the revenue recognition method should not be used.
Point 4: Maria is willing to write Frank a note to the file stating that she takes full responsibility for making the final decision if a legal dispute ever arises. She tells Frank, "Frank, partners must act like partners, and not try to make life difficult for their partners. You have some growing up to do before I would feel comfortable with you as a partner."
Required
Question 1: What are the ethical issues? What should Frank do?
Question 2: Do an analysis of the situation and state your opinion of what Frank should do.
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