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: 1) What are the ethical considerations that Kravetz faces in answering the auditor's question? 2) How should she respond to the question?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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:
1) What are the ethical considerations that Kravetz faces in answering the
auditor's question?
2) How should she respond to the question?
ANSWER:
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Juliet Kravetz, controller of a publicly held corporation specialized in toxic waste clean-up.
The firm is negotiating for a large contract in Western Europe where information is confidential to controller and president of the company.
It hired an outside firm for negotiations, which charges based on man hours plus expenses without any condition for performance.
The charges accrued by the firm till now is $150,000 (material amount for the company).

Kravetz is in dilemma of whether to keep business interest in mind and not to reveal the information to anyone or work within ethical and legal framework by disclosing the expenses associated with the deal to auditors.

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