Question

As a CPA, you are experiencing significant ethical and legal issues in your public company. You suspect that the CEO and CFO might be recognizing revenue before it has been earned. You also know that the preliminary sales estimates reflect a shortfall of approximately $5 million. Bonus money is predicated on reaching the quarterly target. You stand to miss a $25,000 bonus if the target revenue figure is not met. You are somewhat conflicted because you don’t want to be a part of a fraud investigation, but you really could use the bonus money to pay for your son’s college tuition and living expenses. Discuss your ethical and legal options. What steps would you take to resolve the current situation?

Answer 1

The role of the CPA is of the auditor whose responsibility is to detect the fraud and errors committed by the management and not indulging into that fraud or error himself. In the given case, the auditor suspect that the CEO and CFO are recognizing the revenue before it has been earned. But according to the fundamental concept of accrual accounting, the revenue should only be recognized when it is earned. The ethical responsibility of the auditor in this case is to communicate the matter with those charged with governance and ensure that the financial statements are prepared by the management with applicable laws and standards.

The other case is that the auditor has estimated the preliminary sales estimates reflect a shortfall and bonus money is predicated on reaching the quarterly target and bonus money will not be received if the revenue target figure is not met. In this case, the auditor has to perform his duties ethically and not indulging into fraud just because of the reason that bonus money can be used to pay for his son's college tuition and living expenses. It the against the professional ethics of the auditor to be the part of fraud with the management and it will be considered as professional misconduct on the part of the CPA. The consequences of detecting the fraud and not reporting it and also indulging into the fraud is the serious financial crime and he is guilty of professional misconduct which will lead to professional and legal actions against the auditor of not performing his ethical duties diligently.