ETHICS CASE Dilemma of an Accountant In 1976 Senator Lee Metcalf (D-Mont. ) released a report on the public accounting industry which rocked the profession. Despite a decade of revisions in rules and regulations (variously established by the Securities and Exchange Commission, Accounting Principles Board, and Financial Accounting Standards Board), public accounting firms were still perceived by many on Capitol Hill as biased in favor of their clients, incapable of or unwilling to police themselves, and at times participants in coverups of client affairs. Senator Metcalf even went so far as to uggest nationalizing the industry in light of these activities. Just prior to the Metcalf report, Daniel Potter began working as a staff accountant for Baker Greenleaf, one of the Big Eight accounting firms. In preparation for his CPA examination, Dan had rigorously studied the code of ethics of the American Institute of Certified Public Accountants (AICPA) and had thoroughly familiarized himself with his profession’s guidelines for morality. He was aware of ethical situations which might pose practical problems, such as maintaining independence from the client or bearing the responsibility for reporting a lient’s unlawful or unreasonably misleading activities, and he knew the channels through which a CPA was expected to resolve unethical business policies. Dan had taken the guidelines very seriously; they were not only an integral part of the auditing exam, they also expressed to him the fundamental dignity every independent auditor was obligated to maintain and calling of the profession—namely, to help sustain the system of checks and balances on which capitalism has been based. Daniel Potter firmly believed that every independent auditor was obligated to maintain professional integrity, if what he believed o be the best economic system in the world was to survive. Thus, when Senator Metcalf’s report was released, Dan was very interested in discussing it with numerous partners in the firm. They responded thoughtfully to the study and were concerned with the possible ramifications of Senator Metcalf’s assessment. Dan’s discussions at this time and his subsequent experiences during his first year and a half at Baker Greenleaf confirmed his initial impressions that the firm deserved its reputation for excellence in the field. Dan’s own career had been positive. After graduating in economics from an Ivy League school, he ad been accepted into Acorn Business School’s accountant training program, and was sponsored by Baker Greenleaf. His enthusiasm and abilities had been clear from the start, and he was rapidly promoted through the ranks and enlisted to help recruit undergraduates to work for the firm. In describing his own professional ethos, Dan endorsed the Protestant work ethic on which he had been raised, and combined this belief with a strong faith in his own worth and responsibility. A strong adherent to the assumptions behind the profession’s standards and prepared to defend them as a part of his own self-interest, he backed up his reasoning ith an unquestioning belief in loyalty to one’s employer and to the clients who helped support his employer. He liked the clearcut hierarchy of authority and promotion schedule on which Baker Greenleaf was organized, and once had likened his loyalty to his superior to the absolute loyalty which St. Paul advised the slave to have towards his earthly master “out of fear of God” (Colossians 3:22). Thus, when he encountered the first situation where both his boss and his client seemed to be departing from the rules of the profession, Dan’s moral dilemma was deep-seated and difficult to solve. The new assignment began as a welcome challenge.
A long-standing and important account which Baker had always shared with another Big Eight accounting firm needed a special audit, and Baker had reason to expect that a satisfactory performance might secure it the account exclusively. Baker put its best people on the job, and Dan was elated to be included on the special assignment team; success could lead to an important one-year promotion. Oliver Freeman, the project senior, assigned Dan to audit a wholly-owned real estate subsidiary (Sub) which had given Baker a lot of headaches in the past. “I want you to solve the problems we’re having with his Sub, and come out with a clean opinion (i. e. , confirmation that the client’s statements are presented fairly) in one month. I leave it to you to do what you think is necessary. ” For the first time Dan was allotted a subordinate, Gene Doherty, to help him. Gene had worked with the project senior several times before on the same client’s account, and he was not wholly enthusiastic about Oliver’s supervision. “Oliver is completely inflexible about running things his own way—most of the staff accountants hate him. He contributes a 7:00 A. M. to 9:00 P. M. day every day, and expects everyone else to do the same. You’ve really got to put ut, on his terms, to get an excellent evaluation from him. ” Oliver was indeed a strict authoritarian. Several times over the next month Dan and Oliver had petty disagreements over interpretive issues, but when Dan began to realize just how stubborn Oliver was, he regularly deferred to his superior’s opinion. Three days before the audit was due, Dan completed his files and submitted them to Oliver for review. He had uncovered quite a few problems but managed to solve all except one: one of the Sub’s largest real estate properties was valued on the balance sheet at $2 million, and Dan’s own estimate of its value was no more than $100,000.
The property was a run-down structure in an undesirable neighborhood, and had been unoccupied for several years. Dan discussed his proposal to write down the property by $1,900,000 with the Sub’s managers, but since they felt there was a good prospect of renting the property shortly, they refused to write down its value. Discussion with the client had broken off at this point, and Dan had to resolve the disagreement on his own. His courses of action were ambiguous, and depended on how he defined the income statement: according to AICPA regulations on materiality, any difference in opinion between the client and the public accountant which ffected the income statement by more than 3 percent was considered material and had to be disclosed in the CPA’s opinion. The $1,900,000 write-down would have a 7 percent impact on the Sub’s net income, but less than 1 percent on the client’s consolidated net income. Dan eventually decided that since the report on the Sub would be issued separately (although for the client’s internal use only), the write-down did indeed represent a material difference in opinion. The report which he submitted to Oliver Freeman contained a recommendation that it be filed with a subject-to-opinion proviso, which indicated that all he financial statements were reasonable subject to the $1. 9 million adjustment disclosed in the accompanying opinion. After Freeman reviewed Dan’s files, he fired back a list of “To Do’s,” which was the normal procedure at Baker Greenleaf. Included in the list was the following note: 1. Take out the pages in the files where you estimate the value of the real estate property at $100,000. 2. Express an opinion that the real estate properties are correctly evaluated by the Sub. 3. Remove your “subject-to-opinion” designation and substitute a “clean opinion. ” Dan immediately wrote back on the list of “To Do’s” hat he would not alter his assessment since it clearly violated his own reading of accounting regulations. That afternoon Oliver and Dan met behind closed doors. Oliver first pointed out his own views to Dan: 1. He (Oliver) wanted no problems on this audit. With six years of experience he knew better than Dan how to handle the situation. 2. Dan was responsible for a “clean opinion. ” Any neglect of his duties would be viewed as an act of irresponsibility. 3. Any neglect of his duties would be viewed as an act of irresponsibility. 4. The problem was not material to the Client (consolidated) and the Sub’s opinion would only be sed “in house. ” 5. No one read or cared about these financial statements anyway. The exchange became more heated as Dan reasserted his own interpretation of the write-down, which was that it was a material difference to the Sub and a matter of importance from the standpoint of both professional integrity and legality. He posited a situation where Baker issued a clean opinion which the client subsequently used to show prospective buyers of the property in question. Shortly thereafter the buyer might discover the real value of the property and sue for damages. Baker, Oliver, and Dan would be liable. Both men agreed that such a scenario was ighly improbable, but Dan continued to question the ethics of issuing a clean opinion. He fully understood the importance of this particular audit and expressed his loyalty to Baker Greenleaf and to Oliver, but nevertheless believed that, in asking him to issue knowingly a false evaluation, Freeman was transgressing the bounds of conventional loyalty. Ultimately a false audit might not benefit Baker Greenleaf or Dan. Freeman told Dan he was making a mountain out of a molehill and was jeopardizing the client’s account and hence Baker Greenleaf’s welfare. Freeman also reminded Dan that his own welfare patently epended on the personal evaluation which he would receive on this project. Dan hotly replied that he would not be threatened, and as he left the room, he asked, “What would Senator Metcalf think? ” A few days later Dan learned that Freeman had pulled Dan’s analysis from the files and substituted a clean opinion. He also issued a negative evaluation of Daniel Potter’s performance on this audit. Dan knew that he had the right to report the incident to his partner counselor or to the personnel department, but was not terribly satisfied with either approach. He would have preferred to take the issue to an independent review board within the ompany, but Baker Greenleaf had no such board. However, the negative evaluation would stand, Oliver’s arrogance with his junior staff would remain unquestioned, and the files would remain with Dan’s name on them unless he raised the incident with someone. He was not at all sure what he should do. He knew that Oliver’s six years with Baker Greenleaf counted for a lot, and he felt a tremendous obligation to trust his superior’s judgment and perspective. He also was aware that Oliver was inclined to stick to his own opinions. As Dan weighed the alternative, the vision of Senator Metcalf calling for nationalization continued to haunt him.