Surgical Steel, Inc. is a publicly owned company that manufactures medical devices for sale to various hospitals and healthcare organizatios around the country. Midwest Medical Research Hospital is one of the largest hospitals that uses Surgical Steel products. Surgical Steel recently hired Bossley CPA's, LLP, to conduct its December 31, 2022 audit. On February 15, 2023, Seth Smith, a CPA and the audit superviosr for Bossley CPA's, received some disturbing news. It seems that the financial condition of the Midwest Medical Research Hospital has deteriorated to the point that it has filed for bankruptch. Smith contacts Brad Kastler, the controller for Surgical Steel, who confirms that Midwest Medical has filed for bankruptcy. Kastler has spoken to the attorneys, and he has determined that between 50% and 70% of the $3,000,000 acounts receivable balance may be recoverable, although anything over $1,500,000 is unlikely. Based on this information, Smith proposes increasing the December 31, 2022 balance in the allowance for uncollectible accounts by $1,500,000. Kastler point out that such a charge would significantly lower reported profits for the year as well as affect the bonuses that upper management was projected to receive. He asks Smith to meet with him and Art Mendez, Surgical Steel's CEO, to further discuss this matter. A meeting is held between Art Mendez, Brad Kastler, Seth Smith, and Jason Norris (who is the partner in charge of the audit). Mendez suggests that the pending loss should only be footnoted in the amount of $600,000 to $1,000,000. Mendez insists on this treatment for two reasons: (1) Midwest Medical Research Hospital has already confirmed in writing the $3,000,000 balance at December 31, 2022; and (2) a $1,500,000 charge-off will put Surgical Steel in violation of its debt covenant agreement because its working capital will be below the minimum required amount. Moreover, the lender may accelerate the due date of the debt because of the loan covenant violation, thereby requiring Surgical Steel to use $6 million that has been earmarked for expansion, to pay off the debt. At this point, Smith and Norris decide to postpone a final decision on the write-off so they can meet with the consulting partner on the engagement.

1. What are some of the professional and ethical responsibilities of the CPA?

2. What are the accounting issues (mechanically, what should happen in the acounts- receivables estimates, write downs, allowance account, bad debt expense, impact to income, impact to various financial statement ratios, etc.) and what are the ethical issues in this case?

3. What would happen if the CPA and CPA Firm decided to comply with what the client was asking for (Surgical Steel wants only a disclosure in the footnotes of the pending loss since Midwest already confirmed the receivable balance at year-end)? Surgical Steel's desire was to disclose the potential loss in the footnotes to the financial statements and NOT make and adjustment to the allowance account and bad debt expense. How would that decision affect things? Is that decision profitable? is the decision legal? Is it ethical? Does Sarbanes Oxley 2002 play a role here?