Chapter 3, Problem 2EIA

Case 2. Brent Robertson and his banker were reviewing the quarterly income statements for his consulting business, Robertson and Associates, Inc. The banker was impressed with the growth of sales revenue and net income for the second quarter of this year as compared to the second quarter of last year. Brent knew it had been a good quarter, but didn’t think it had been spectacular. Suddenly, Brent realized that he failed to close out the revenue and expense accounts for the prior quarter, which ended in March. Because those temporary accounts were not closed out, their balances were included in the second quarter amounts for the current year. Brent then realized that the banker had the financial statements but not the general ledger or any trial balances. Thus, the banker would not be able to see that the accounting cycle from the first quarter was not properly closed and that this failure was creating a misstated income statement for the second quarter of the current year. The banker then commented that the business appeared to be performing so well that he would approve a line of credit for the business. Brent decided to not say anything because he did not want to lose the line of credit. Besides, he thought, it really did not matter that the income statement was misstated because his business would be sure to repay any amounts borrowed.

Should Brent have informed the banker of the mistake made, and should he have redone the second quarter’s income statement? Was Brent’s failure to close the prior quarter’s revenue and expense accounts unethical? Does the fact that the business will repay the loan matter?