Survive the Year

Topic: Asset Valuation/Write – Downs

Characters: Chris, new controller of a small construction company Robin, CEO of the same company


Chris, a CPA and formerly a staff accountant for a large public accounting firm, is the new controller for a small construction company that employs 60 people. The company is now facing tough times in light of a downturn in the construction industry.

Both Chris and the CEO, Robin, know the collectibility of a material receivable from Ender Corporation is in doubt. Just before year-end, Chris goes in to talk to Robin. Chris says, “Ender has real problems. The word on the street is they won’t last the year. We need to adjust the allowance for the Ender receivable.”

Robin replies, “If we do that, we’re not going to look good, and the auditor may have to mention our shaky financial position. If we don’t get a clean opinion, we won’t get the bank loan we’re applying for, and we might be out of business, too, by this time next year. This loan is really important to us. If we can just weather this downturn, I know business will pick up.”

Back in the controller’s office, Chris ponders what can be done to help Robin and the company. Chris remembers the past years working in public accounting and is certain the auditor would want to know about Ender’s difficulties.

Author: Sandra K. Fleak, Associate Professor of Accounting, Northeast Missouri State University

Co-author: Phillip J. Korb, Assistant Professor, University of Baltimore

What Are the Relevant Facts?

  1. The company for which Chris is controller is facing financial difficulties and needs a bank loan to continue in existence.
  2. Chris and Robin, the CEO, know a material receivable is probably uncollectable, but no adjustment to the allowance account has yet been made.
  3. Robin, the CEO, fears that booking the allowance adjustment will cause the auditor to report the construction company’s shaky financial position in the audit report.
  4. Without a clean audit opinion, the bank will likely refuse the loan, and the construction company may fail.

What Are the Ethical Issues?

  1. The primary issues for Chris are honesty, integrity, personal reputation, and professional responsibility to the company, auditor, and the bank, versus the welfare of the company and its owners and employees.
  2. Can Chris represent the Ender receivable without jeopardizing the bank loan application and without violating professional standards?

Who Are the Primary Stakeholders?

  • Chris, the controller
  • Robin, the CEO
  • Employees and stockholders of the construction company
  • The bank that is evaluating the loan application
  • The auditor
  • Ender Corporation

What Are the Possible Alternatives?

Chris can:

  1. Not snake the allowance adjustment and hope that the auditor will not ask about the likelihood of Ender’s payment or be prepared to minimize Ender’s difficulties.
  2. Make the allowance adjustment for the total expected uncollectable and/or be straightforward with the auditor about Ender’s receivable.
  3. Not make the allowance adjustment but provide information to the auditor that will effectively lead to revealing the uncollectability of the Ender account.
  4. Make a partial adjustment for the uncollectable receivable balance.

What Are the Ethics of the Alternatives?

  • Based on a utilitarian costs and benefits analysis, for each alternative:
  1. What are the benefits and costs to each stakeholder?
  2. Do the benefits of getting the bank loan outweigh the possible costs to Chris and the company?
  • Based on a “rights” perspective, for each alternative:
  1. What are the rights of each stakeholder?
  2. What are the responsibilities of Chris, Robin, the auditor, and the bank?
  3. Which alternative would you prefer if you were an employee of the construction company? The bank? The auditor?
  • From a “justice” perspective:
  1. For each of Chris’s alternatives, which stakeholders have the greatest burdens and the greatest benefits?
  2. Which alternative most fairly distributes the benefits and burdens?

What Are the Practical Constraints?

  1. Chris must consider the legal ramification of misrepresenting the company’s financial position to the bank.
  2. The auditor may also find out about Ender’s financial difficulties.

What Actions Should Be Taken?

  1. What action would you take if you were in Chris’s situation?
  2. Which ethical theories most helped you to make your decision?