The Case Study: Contingencies and Internal Conflicts As an accounting intern, you have enjoyed the opportunity to work at AR Manufacturing (ARM) but are also looking forward to returning to XYZ University . During the internship, you initially worked in the Operations Accounting group where you learned about ARMs operations and the accounting processes and the importance of contractual terms and conditions. In the second half of the internship, you were moved to the financial reporting group and have gained significant exposure to and understanding of the companys accounting policies and the GAAP on which the companys accounting and reporting is based. The Directors of both the Operations Accounting and Financial Reporting have communicated their appreciation of your work and that you were the type of student they would like to hire when you graduate.

Your time at ARM is coming to an end in another week, and you have become aware of a potential accounting issue. You know from your Intermediate Accounting I class that accounting for contingencies can be complex and require consideration of outcome probabilities to determine recognition or disclosure obligations. The companys fiscal year end ended two days ago and in the review of potential disclosures related to operations, you have discovered that a company lawyer has argued that disclosure of a potential contingency issue is almost certain to result in litigation against ARM. When you ask your former manager in Operations Accounting about the situation, she tells you an environmental issue exists and no analysis of probabilities of outcomes has been performed because ARMs lawyers decided to defer any accounting analysis until they can assess legal risk which may not occur until after the annual report is filed. You had also heard in Financial Reporting that ARM management have been very focused on meeting current year targets and corporate social responsibility goals. The Reporting Manager said Managements drivers were concerns about meeting investment analysts revenue and earnings forecasts for the fiscal year, avoiding negative press about company operations, and not meeting performance goals that could impact bonuses for all of ARMs employees.

You really would like to have an opportunity to join ARM on graduation and know having the support of the Operations Accounting and Financial Reporting Directs would be key to achieving this goal. As an intern, you are a temporary employee and subject to ARMs code of conduct. However, you are concerned if you raise the potential accounting issue it could negatively impact the relationships you developed during your internship. You also know the auditors will ask about exposures and contingencies as part of their audit inquiries and believe the issue will most likely be discovered during this process. Given the potential accounting issue you have become aware, what are you going to do?