Ethics Case

Pat is 22 years old who has just graduated from the local University (with minimal student loans) and has landed a great job as an accountant for Crazy House Interiors, Inc., an upscale design studio. Crazy House Interiors is a publicly traded corporation with a calendar year end.

Working for the Corporate Controller, who in turn reports directly to the Chief Financial Officer, Pat believed this job is a fantastic opportunity. Pat has a great apartment, loves living in a new city and is making a lot of new friends.

The Controller has recently asked Pat to do him a favor. Crazy House is planning to ask one of the local banks for a loan. However, there is some concern because this years revenue (2020) is considerably lower than the revenue of the previous year (2019).

One of the designers has just landed a contract for a large, profitable project. Half of the fee for the project is to be collected when the contract is signed at the end of November 2020, with the remainder of the money due when the project is completed. Work is scheduled to begin in January 2021, with an estimated completion date of April 2021.

The Controller has asked Pat to record the initial payment of $125,000 as revenue at the time the money is received. Not wanting to disappoint the boss, Pat originally agreed to record the transaction as requested. However, Pat is having second thoughts about recording the transaction.

Objective:

While you may never encounter the same situation as Pat, it is more than likely you will encounter requests where accounting judgments and ethical considerations appear unclear. You may choose to comply with the request, refuse the request and face possible adverse consequences, or leave the organization. Will your decision be tempered by your specific family or financial situation?

This case allows you the opportunity to consider what you might do in such a situation before the situation presents itself.

Tasks:

• This is a group assignment and should be completed in groups of 2 students. Each student should contribute an equal amount of work.
• Each group should separately answer each of the items below. Clearly identify your rationale for each statement you make.
• Please limit your response to two pages.
• Each page should be numbered and the first line of each paragraph indented. Use 12-point font and single space your paper.

1) Identify the accounting issue(s) related to the basic accounting concepts and accounting principles. Are any being violated? How? What solution(s) would you recommend Pat offer to the Controller?

2) Identify any ethical issue(s) Pat may face regarding the Controllers request. As an example, is it ethical to provide a lender with financial statements that include the additional $125,000 in revenue? Would the loan be made if the $125,000 revenue wasnt included? How should Pat address the issue(s) with the Controller?

3) What should Pat do, if after speaking with the Controller, Pat is instructed to make the entries as requested?

4) Would your response to item 3 be any different if Pat was a 33-year-old single parent with limited financial resources who also recently graduated with an accounting degree and has no previous work experience?