Cash in Hand

Topic: Revenue Recognition/Misrepresentation of Fact by Client

Characters: Heather Hunter, Senior in CPA firm “Buzz” Thompson, Owner/manager of Fashion First Sandy, part-time bookkeeper of Fashion First


In addition to the usual mix of compilation, review and audit clients for which Heather Hunt serves as a senior in a small office of a regional CPA firm, she has been assigned a new client that recently engaged the firm. Fashion First, an incorporated retail outlet, is a thriving local store. The business is run by a single owner/manager, “Buzz” Thompson, who makes all major decisions. The business has not previously used the services of a CPA firm. In addition to preparation of financial statements, the CPA firm will handle tax returns for the business.

At her first visit to the client’s office, Heather is introduced to Sandy, the part-time bookkeeper who is also a full-time accounting student at the local university. At a subsequent meeting, Sandy confides to Heather that she found the job at the beginning of the semester after an extensive search. Sandy really needs the money to help finance her education, and feels lucky to have found a good-paying job during the current economic downturn. Feeling that Heather is someone she can talk to and get advice from, Sandy describes a situation that has been on her mind for some time now.

Sandy’s concern relates to the handling of sales revenues. When monies from sales revenues are counted and deposited on a weekly basis, a chart is filled out with categories carefully delineating the type of payment: cash, checks, American Express, or Visa/Mastercard. Sandy’s employer, after depositing the weekly total, brings this chart back with his own written-in total of the actual amount deposited.

After looking over some of these weekly deposit chats, Sandy noticed that $500 cash was missing from each deposit. After a more thorough inspection of monthly tax documents that “Buzz” Thompson has filled out, Sandy noticed that the reported monthly gross revenue was $2,000 less than what had been actually counted.

The employer is the only person handling the money after it has been counted. He is also the only one to deposit the money. When Sandy asked Mr. Thompson about revenue not being reported for tax purposes, he assured her that every dollar of income was reported on the tax forms. Furthermore, “Buzz” asserted, since Sandy wasn’t the person who signed the forms, she shouldn’t be concerned.

Author: Mary  Brady Greenawalt, Associate Professor of Business Administration, The Citadel

Co-author: Janine Cloutier, Virginia Tech

What Are the Relevant Facts?

  1. Heather Hunt is a senior in a small, regional CPA firm.
  2. Heather’s new client is an incorporated retail outlet, Fashion First.
  3. The part-time bookkeeper and the owner/manager have handled all record-keeping and tax reporting functions up to the present.
  4. This is the first time that Fashion First has used a CPA firm.
  5. The CPA firm has been engaged to prepare financial statements and handle tax returns.

What Are the Ethical Issues?

  1. Questionable reporting of cash revenue by the client.
  2. What are the issues emerging from this apparent co-mingling of corporate and personal assets?
  3. If this is simply a compilation rather than a review, do Heather and the CPA firm face ethical issues?

Who Are the Primary Stakeholders?

  • Sandy, the part-time bookkeeper
  • “Buzz” Thompson, the owner/manager
  • Heather Hunt, the senior on the job
  • The partner in charge of the job for the CPA firm
  • The CPA firm
  • The IRS and the state tax agency
  • Taxpayers
  • Actual or potential lenders of the company

What Are the Possible Alternatives?

Ask students to identify alternatives available to both Sandy and Heather.

  • Sandy’s alternatives:
  1. Do nothing–keep the job
  2. Stay with the job but insist on changes in revenue reporting.
  3. Resign from the position.
  4. Other
  • Heather’s alternatives:
  1. Provide advice to Sandy about her alternatives (see above).
  2. Decline to counsel Sandy.
  3. Talk to Sandy but no one else.
  4. Report Sandy’s observations/concerns to her manager and/or partner
  5. If engagement is dropped, take no further action.
  6. If engagement is retained: Take no further action. Document disagreement with the partner’s decision in the work papers. Ask to be removed from the engagement. Resign her position.
  1. Report situation to the media—“blow the whistle.” action. Document disagreement with the partner’s decision in the work papers. Ask to be removed from the engagement. Resign her position.
  1. Report situation to the media—“blow the whistle.”

What Are the Ethics of the Alternatives?

  • Ask questions based on the “Utilitarian” approach:
  1. For each alternative, who benefits and who loses?
  2. For each alternative, do the net benefits exceed the net costs to all primary stakeholders? How would costs be measured in this scenario?
  • Ask questions based on a “rights” approach:
  1. Whose rights are violated in each possible alternative? What does each stakeholder have the right to expect?
  • Ask questions based on a “justice” approach:
  1. For each decision to be made by those involved, which alternatives distribute the benefits and burdens most fairly among the stakeholders?

What Are the Practical Constraints?

  1. The legal ramifications of any actions taken must be considered by Sandy, Heather, mand the CPA firm management.
  2. The guidance provided by the appropriate professional standards should be taken into account by the CPAs, Heather and the partner(s). See, for example, paragraphs AR 100.12, AR 10029, and AR 100.39-.41 in the AICPA

What actions should Heather take? What alternatives would you choose if you were in this situation? Why?

What should the CPA firm do? Why?

What should Sandy do? Why?

What ethical theories (Rights, Justice, Utilitarian, etc.) are applicable to this situation?

What advice should Heather give Sandy, if any?

Should the actions differ depending on whether the engagement is for a compilation or for a review?