Question

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.” Questions | Ethics Case 20-3 | Softening the blow How would the actions contemplated contribute toward “softening” the bad news? 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?

Answer 1

AMT Transport is the long time client for Joy Martin. However their primary responsibility, as external auditors, is to the shareholders of AMT transport and to give true and fair opinion on the financial statements.

Yes, Joy is in ethical dilemma, considering the above facts. Although, it will not be ethical on Joy's part that changing the actual results and position of the company's financial statements by changing inventory methods and reconsidering the estimates.

Changing the financial results of the company would benefit the company as the results of the company will get increased but shareholders of the company will not get true picture of the financial position of the AMT Transport. So we can say, by following up on Joy's thoughts of changing inventory methods and reconsidering the estimates, it is company/ management who would benefit and the shareholders who would be injured.