Ethical Dilemma - Change of Accounting Principles and Estimates

Discussion: (For your answer focus only on changes in accounting estimates and principles.)

Natalie Winters is the senior accountant for Delftmore, Inc. Terrel Jeffrey is a staff accountant who reports to Natalie. The company is projected to show lower earnings this year as compared to the previous two years. The CEO of the company is pressuring Natalie to be creative in figuring out a way to increase net income for the year.

Natalie explains the problem to Terrel, asking for his help. After discussing the situation, the two accountants decide that their best choice is to change accounting estimates or accounting principles to either lower expenses or increase net income.

Address the following questions in your post:

1. What kind of concerns might be causing the CEO to lean on the accountants to change the accounting records?
2. Why would the accountants be willing to do what the CEO asked?
3. How can changing accounting estimates and principles impact net income? What types of changes would increase income or lower expenses? Which type of change has the best chance of looking legitimate?
4. How does the requirement for retrospective or prospective adjustments impact Natalies and Terrells plan to falsify the financial statements?
5. If you are auditing Delftmores financial statements how might you figure out the ways that the financial statements have been misrepresented?