Ethics Case 1-8
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 statements because the auditors' fees for performing the audit are paid 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.
Required:
How might an auditor's ethics be challenged while performing an audit?

Judgment Case 2-1
You have recently been hired by Davis & Company, a small public accounting firm. One of the firm's partners, Alice Davis, has asked you to deal with a disgruntled client, Mr. Sean Pitt, owner of the city's largest hardware store. Mr. Pitt is applying to a local bank for a substantial loan to remodel his store. The bank requires accrual based financial statements but Mr. Pitt has always kept the company's records on a cash basis. He does not see the purpose of accrual based statements. His most recent outburst went something like this: “After all, I collect cash from customers, pay my bills in cash, and I am going to pay the bank loan with cash. And, I already show my building and equipment as assets and depreciate them. I just don't understand the problem.”
Required:
1. Explain the difference between a cash basis and an accrual basis measure of performance.
2. Why, in most cases, does accrual basis net income provide a better measure of performance than net operating cash flow?
3. Explain the purpose of adjusting entries as they relate to the difference between cash and accrual accounting.

Ethics Case 3-16
You are in your third year as an accountant with McCarver-Lynn Industries, a multidivisional company involved in the manufacturing, marketing, and sales of surgical prosthetic devices. After the fiscal year-end, you are working with the controller of the firm to prepare geographic area disclosures. Yesterday you presented her with the following summary information:

                                                            $ in millions
               Domestic Lybia Egypt France Cayman Islands Total
Revenues    $845       $222    $265    $343    $2311             $3986
Operating       145       76       88       21          642                972
Income
Assets       1005          301    290       38          295                1919

Upon returning to your office after lunch, you find the following memo:
Nice work. Let's combine the data this way:

                                                               $ in millions

               Domestic       Africa       Europe and Other Foreign    Total
Revenues    $845          $487                $2654                         $3986
Capital
Expenditures 145             164                      663                            972
Assets          1005             591                   323                            1919

Because of political instability in North Africa, let's not disclose specific countries. In addition, we restructured most of our French sales and some of our U.S. sales to occur through our offices in the Cayman Islands. This allows us to avoid paying higher taxes in those countries. The Cayman Islands has a 0% corporate income tax rate. We don't want to highlight our ability to shift profits to avoid taxes.
Required:
Do you perceive an ethical dilemma? What would be the likely impact of following the controller's suggestions? Who would benefit? Who would be injured?

Ethics Case 13-5
Outdoors R Us owns several membership-based campground resorts throughout the Southwest. The company sells campground sites to new members, usually during a get-acquainted visit and tour. The campgrounds offer a wider array of on-site facilities than most. New members sign a multiyear contract, pay a down payment, and make monthly installment payments. Because no credit check is made and many memberships originate on a spur-of-the-moment basis, cancellations are not uncommon.
Business has been brisk during its first three years of operations, and since going public in 2003, the market value of its stock has tripled. The first sign of trouble came in 2016 when the new sales dipped sharply.
One afternoon, two weeks before the end of the fiscal year, Diane Rice, CEO, and Gene Sun, controller, were having an active discussion in Sun's office.
• Sun: I've thought more about our discussion yesterday. Maybe something can be done about profits.
• Rice: I hope so. Our bonuses and stock value are riding on this period's performance.
• Sun: We've been recording deferred revenues when new members sign up. Rather than recording liabilities at the time memberships are sold, I think we can justify reporting sales revenue for all memberships sold.
• Rice: What will be the effect on profits?
• Sun: I haven't run the numbers yet, but let's just say very favorable.
Required:
1. Why do you think liabilities had been recorded previously?
2. Is the proposal ethical?
3. Who would be affected if the proposal is implemented?

Ethics Case 14-8
The cloudy afternoon mirrored the mood of the conference of division managers. Claude Meyer, assistant to the controller for Hunt Manufacturing, wore one of the gloomy faces that were just emerging from the conference room. “Wow, I knew it was bad, but not that bad,” Claude thought to himself. “I don't look forward to sharing those numbers with shareholders.”
The numbers he discussed with himself were fourth quarter losses which more than offset the profits of the first three quarters. Everyone had known for some time that poor sales forecasts and production delays had wreaked havoc on the bottom line, but most were caught off guard by the severity of damage.
Later that night he sat alone in his office, scanning and rescanning the preliminary financial statements on his computer monitor. Suddenly his mood brightened. “This may work,” he said aloud, though no one could hear. Fifteen minutes later he congratulated himself, “Yes!”
The next day he eagerly explained his plan to Susan Barr, controller of Hunt for the last six years. The plan involved $300 million in convertible bonds issued three years earlier.
• Meyer: By swapping stock for the bonds, we can eliminate a substantial liability from the balance sheet, wipe out most of our interest expense, and reduce our loss. In fact, the book value of the bonds is significantly more than the market value of the stock we'd issue. I think we can produce a profit.
• Barr: But Claude, our bondholders are not inclined to convert the bonds.
• Meyer: Right. But, the bonds are callable. As of this year, we can call the bonds at a call premium of 1%. Given the choice of accepting that redemption price or converting to stock, they'll all convert. We won't have to pay a cent. And, since no cash will be paid, we won't pay taxes either.
Required:
Do you perceive an ethical dilemma? What would be the impact of following up on Claude's plan? Who would benefit? Who would be injured?
An ethical dilemma exists as “Should Hunt Manufacturing call the bonds primarily for window dressing rather than for economic reasons?

Ethics Case 1-8 It is the responsibility of management to apply ac...