Question

Frank Dorrance, a senior audit manager for Bright and Lorren, a public accounting firm, has recently been informed that the firm hopes to promote him to partner within the next year or two. Frank excels at dealing effectively with all people, including client personnel, professional staff, partners, and potential clients. He has recently built a bigger home for entertaining and has joined the city's most prestigious golf and tennis club. He

is excited about his future with the firm.

Frank has recently been assigned to the audit of Machine International Corp., a large wholesale company that ships goods throughout the world. It is one of Bright and Lorren's most prestigious clients. During the audit, Frank determines that Machine International Corp. uses a method of revenue recognition called "bill and hold," which has been questioned by the Ontario Securities Commission (OSC). After considerable research,Frank concludes that the method of revenue recognition is not appropriate for Machine International Corp.

Frank discusses the matter with the engagement partner, Maria da Silva, who concludes that the accounting method has been used for more than 10 years by the client and is appropriate, especially considering that the client does not file with the OSC. Maria is certain the firm would lose the client if the revenue recognition method was found inappropriate. Frank argues that the revenue recognition method was appropriate in previous years but that the OSC ruling makes it inappropriate in the current year. Frank recognizes the partner's responsibility to make the final decision, but he feels strongly that the revenue recognition method is inappropriate. Maria is willing to write Frank a letter stating that she takes full responsibility for making the final decision if a legal dispute ever arises. She concludes by saying, "Frank, partners must act like partners, not like loose cannons trying to make life difficult for their partners. You have some growing up to do before I would feel comfortable with you as a partner."

Required

a. What are the ethical issues? What should Frank do?

Using the nine-step approach to case analysis, state your opinion of what Frank should do.

b. Assume the role of Frank Dorrance, and provide

memo to Maria da Silva

summarizing the issues and explaining your point of view, recommendation, and plans.