It is the end of the accounting year for Anne Beatty, controller of a medium-sized, publicly held corporation specializing in toxic waste cleanup. Within the corporation, only Beatty and the president know that the firm has been negotiating for several months to land a large contract for waste cleanup in Western Europe. The president has hired another firm with excellent contacts in Western Europe to help with negotiations. The outside firm will charge an hourly fee plus expenses, but has agreed not to submit a bill until the negotiations are in their final stages (expected to occur in another 3 to 4 months). Even if the contract falls through, the outside firm is entitled to receive payment for its services. Based upon her discussion with a member of the outside firm, Beatty knows that its charge for services provided to date will be \(\$ 150,000\). This is a material amount for the company.
Beatty knows that the president wants negotiations to remain as secret as possible so that competitors will not learn of the contract the company is pursuing in Europe. In fact, the president recently stated to her, "This is not the time to reveal our actions in Western Europe to other staff members, our auditors, or the readers of our financial statements; securing this contract is crucial to our future growth." No entry has been made in the accounting records for the cost of contract negotiations. Beatty now faces an uncomfortable situation. The company's outside auditor has just asked her if she knows of any yearend adjustments that have not yet been recorded.
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a. What are the ethical considerations that Beatty faces in answering the auditor's question?
(b). How should Beatty respond to the auditor's question?