Ed Wang is an owner and audit partner for Wang, Zang, & Chen, LLC. As the audit on Green Solar Company (a private company) was reaching its concluding stages on January 15, 2021, Wang met with Kerry Carpenter, the CFO of Green Solar, to discuss the inventory measurement of one its highly-valued products as of the balance-sheet date, December 31, 2020. Wang told Carpenter that a write-down of 20 percent had to be made because the net realizable value of the inventory on December 31 was 20 percent less than the original cost recorded on its books. That meant the earnings for the year would be reduced by $2 million and the client would show a loss for the year. In a heated exchange, Carpenter demanded that Wang use the value at January 15, 2021, which reflected a full recovery of the "proposed" 20 percent write-down. Carpenter reminded Wang that the financial statement issuance date would be January 31, so the recovery value would be acceptable under GAAP. Besides, Carpenter said, the previous auditors had allowed her to do a similar thing. She went on to explain that the market value for this product was known to be volatile and a smoothing effect was justified in the accounting procedures.

Wang was under a great deal of pressure from the other two partners of the firm to keep Carpenter happy. It seemed that Wang, Zang, & Chen was about to provide hosting services for Green Solar Company and other management advisory services. The hosting services included providing electronic security and back-up services for the attest client's data and records. The revenue from these arrangements could turn out to be twice the audit fees. Wang called a meeting of the other partners. He was concerned that the final vote would be 2-1 to accept the clients interpretation of the accounting rules and record the inventory at the January 15 value.

Please provide answers to the following questions:

• Did Carpenter apply the correct interpretation of GAAP rules for inventory valuation? Explain.
• Would independence be impaired if the firm were offered, and accepted, the hosting services? Explain.
• Put yourself in Wang's position. You are preparing for the meeting with the other two partners. Consider the following in crafting an outline of points you might have to respond to.
  • What is at stake for the key parties, including those who disagree with you?
  • What levers can you use to influence those who disagree with you?
  • What is your most powerful and persuasive response to the reasons and rationalizations you might need to address? To whom should the argument be made? When and in what context?