You are a CPA and the controller for small savings and loans. The organization is at a critical juncture. You and the top management of the savings and loan have a meeting about the current status of the organization prior to your annual audit. The main concern is the collectability of several real estate loans. The savings and loan is a small player in a group of savings and loans that participated in several large development properties. While the savings and loan investment is small compared to the overall total investment in these projects, the amount invested is material to your firm’s balance sheet. With the recent downturn in the housing market, the futures of the development properties are in jeopardy.

The president of the savings and loan just participated in a phone conference with the other investors and tells you that a group of the largest investors is negotiating with the developers on a write‐down on the loans. The potential write‐down of these assets would have a devastating impact on the solvency of your savings and loan. Management points out that at this time there are only discussions going on and nothing has been committed to paper, but it is a real fear that the process will progress and a write‐down is likely within the next six months.

The auditors are scheduled to begin their audit next week. If you disclose this information to the auditors you fear that it will lead to a “Going Concern” opinion, which in most probability would be the beginning of the end for the institution. Not disclosing the potential write‐down would give you a chance to locate a position elsewhere prior to the failing of the savings and loan.

Required

What do you do?

What ethical issues are involved in the case?