Issue: It is the end of an accounting year for Juliet Kravetz, controller of a medium-sized, publicly held corporation specializing in toxic waste cleanup. Within the corporation, only Kravetz and the president know that the firm has been negotiating for several months to land a very large contract for waste cleanup in Western Europe. The president has hired another firm with excellent contacts in Western Europe to help with the negotiations. The outside firm charges an hourly fee plus expenses, but has agreed not to submit a bill until the negotiations are in their final stages (expected to occur in another three to four months). Even if the contract falls through, the outside firm is entitled to receive payment for its services. Based upon her discussion with a member of the outside firm, Kravetz knows that its charge for services provided to date will be $150,000. This is a material amount for the company. Kravetz knows that the president wants the negotiations to remain as secret as possible so that competitors will not learn of the European contract that the company is pursuing. Indeed, the president recently stated to her, “This is not the time to reveal our actions in Western Europe to other staff members, our auditors, or readers of our financial statements; securing this contract is crucial to our future growth.” No entry has been made in the accounting records for the cost of the contract negotiations. Kravetz now faces an uncomfortable situation. The company’s outside auditor has just asked her if she knows of any year-end adjustments that have not yet been recorded. Questions to be Answered: What are the ethical considerations that Kravetz faces in answering the auditor’s question? How should she respond to the question?
Issue: It is the end of an accounting year for Juliet Kravetz, controller of a medium-sized, publicly held corporation specializing in toxic waste cleanup. Within the corporation, only Kravetz and the president know that the firm has been negotiating for several months to land a very large contract for waste cleanup in Western Europe. The president has hired another firm with excellent contacts in Western Europe to help with the negotiations. The outside firm charges an hourly fee plus expenses, but has agreed not to submit a bill until the negotiations are in their final stages (expected to occur in another three to four months). Even if the contract falls through, the outside firm is entitled to receive payment for its services. Based upon her discussion with a member of the outside firm, Kravetz knows that its charge for services provided to date will be $150,000. This is a material amount for the company.
Kravetz knows that the president wants the negotiations to remain as secret as possible so that competitors will not learn of the European contract that the company is pursuing. Indeed, the president recently stated to her, “This is not the time to reveal our actions in Western Europe to other staff members, our auditors, or readers of our financial statements; securing this contract is crucial to our future growth.” No entry has been made in the accounting records for the cost of the contract negotiations. Kravetz now faces an uncomfortable situation. The company’s outside auditor has just asked her if she knows of any year-end adjustments that have not yet been recorded.
Questions to be Answered:
- What are the ethical considerations that Kravetz faces in answering the auditor’s question?
- How should she respond to the question?
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