Team Exercise: What to Report The audit of Belchfire Industries has just been completed, and for the first time in many years, the company will report a significant loss. Prior to the final preparation of the financial statements, the company’s president and its chief financial officer meet with the auditor and propose a change to a different set of accounting methods. Using the proposed accounting methods, the company will show a small profit for the year. The president argues that the new methods better reflect the results of the company’s operations than the current methods that have been used for many years. The chief financial officer isn’t so sure that they do, but does like the bottom-line result. The auditor is convinced that the only reason for the change is to avoid reporting a loss. On the other hand, the proposed methods are considered acceptable to the accounting profession, and the change will be disclosed in the financial statements. The auditor is wavering because the president has threatened to find another auditor if agreement is not reached on the changes, and Belchfire is the audit firm’s largest client. The audit manager's career would not seem terribly promising if the firm’s largest client were lost. Nevertheless, the auditor feels the public might be misled by the change in accounting methods. Besides, the company would have to incur substantial additional audit fees if it changed auditors, and the financial statements would be delayed, not something the president wants.

Organize in teams of four or five people. One person play the role of the president, one play the chief financial officer, one play the auditor, and one or two play interested external parties (e.g., major stockholder, creditor). Present your position on the change in accounting methods and reasons supporting your position. Resolve the conflict and come to a solution.