Ethics Case: It is the responsibility of management to apply accounting standards when communicating with investors and creditors through financial statements

Ethics Case 1-8 The auditors’ responsibility

It is the responsibility of management to apply accounting standards when communicating with investors and creditors through financial statements. Another group, auditors, serves as an independent intermediary to help ensure that management has in fact appropriately applied GAAP in preparing the company's financial statements. Auditors examine (audit) financial statements to express a professional, independent opinion. The opinion reflects the auditors' assessment of the statements' fairness, which is determined by the extent to which they are prepared in compliance with GAAP.

Some feel that it is impossible for an auditor to give an independent opinion on a company's financial statement because the auditors' fees for performing the audit are paid for by the company. In addition to the audit fee, quite often the auditor performs other services for the company such as preparing the company's income tax returns.

How might an auditor's ethics be challenged while performing an audit?

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(Ethics Case) International Network Solutions provides products and services related to remote access networking

Ethics Case 19-7 International Network Solutions

International Network Solutions provides products and services related to remote access networking. The company has grown rapidly during its first 10 years of operations. As its segment of the industry has begun to mature, though, the fast growth of previous years has begun to slow. In fact, this year revenues and profits are roughly the same as last year.

One morning, nine weeks before the close of the fiscal year, Rob Mashburn, CFO, and Jessica Lane, controller, were sharing coffee and ideas in Lane's office.

Lane:  About the Board meeting Thursday. You may be right. This may be the time to suggest a share buyback program.
Mashburn:  To begin this year, you mean?
Lane:  Right! I know Barber will be lobbying to use the funds for our European expansion. She's probably right about the best use of our funds, but we can always issue more notes next year. Right now, we need a quick fix for our EPS numbers.
Mashburn: Our shareholders are accustomed to increases every year.

Required:
1. How will a buyback of shares provide a “quick fix” for EPS?
2. Is the proposal ethical?
3. Who would be affected if the proposal is implemented?

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Where's the cash? (Ethics Case 21-7)

Ethics Case 21-7 Where's the cash?

After graduating near the top of his class, Ben Naegle was hired by the local office of a Big 4 CPA firm in his hometown. Two years later, impressed with his technical skills and experience, Park Electronics, a large regional consumer electronics chain, hired Ben as assistant controller. This was last week. Now Ben's initial excitement has turned to distress.

The cause of Ben's distress is the set of financial statements he's stared at for the last four hours. For some time prior to his recruitment, he had been aware of the long trend of moderate profitability of his new employer. The reports on his desk confirm the slight, but steady, improvements in net income in recent years. The trend he was just now becoming aware of, though, was the decline in cash flows from operations.

Ben had sketched out the following comparison ($ in millions):
2011 2010 2009 2008
Income from Operations $140.0 $132.0 $127.5 $127.0
Net Income 38.5 35.0 34.5 29.5
Cash Flow from Operations 1.6 17.0 12.0 15.5

Profits? Yes. Increasing profits? Yes. The cause of his distress? The ominous trend in cash flow which is consistently lower than net income.

Upon closer review, Ben noticed three events in the last two years that, unfortunately, seemed related:

a. Park's credit policy had been loosened; credit terms were relaxed and payment periods were lengthened.
b. Accounts receivable balances had increased dramatically.
c. Several of the company's compensation arrangements, including that of the controller and the company president, were based on reported net income.

Required:
1. What is so ominous about the combination of events Ben sees?
2. What course of action, if any, should Ben take?

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Ethics Case 20-5 Softening the blow

Ethics Case 20-5 Softening the blow

Late one Thursday afternoon, Joy Martin, a veteran audit manager with a regional CPA firm, was reviewing documents for a long-time client of the firm, AMT Transport. The year-end audit was scheduled to begin Monday.

For three months, the economy had been in a down cycle and the transportation industry was particularly hard hit. As a result, Joy expected AMT's financial results would not be pleasant news to shareholders. However, what Joy saw in the preliminary statements made her sigh aloud. Results were much worse than she feared.

"Larry (the company president) already is in the doghouse with shareholders," Joy thought to herself. "When they see these numbers, they'll hang him out to dry."

"I wonder if he's considered some strategic accounting changes," she thought, after reflecting on the situation. "The bad news could be softened quite a bit by changing inventory methods from LIFO to FIFO or reconsidering some of the estimates used in other areas."

Required:
1. How would the actions contemplated contribute toward "softening" the bad news?
2. Do you perceive an ethical dilemma? What would be the likely impact of following up on Joy's thoughts? Who would benefit? Who would be injured?

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