Summary
Highlights
A new CPA at Ditt and Ali, a growing internet retailer, receives instructions from their supervisor to make three material year-end adjustments that appear inappropriate: adjusting $850,000 for bill and hold sales, applying a $500,000 wire to an overdue account to avoid auditor questions, and reducing the reserve for doubtful accounts by half a million. The CPA recognizes the materiality and potential error of these entries after reviewing guidance and recalling a heated discussion about an overdue balance.
The supervisor dismisses the CPA's concerns, stating the adjustments are material but don't impact current year earnings and are made consistently. The supervisor then demands the CPA complete a borrowing base certificate for a debt facility renewal and expansion, with auditors arriving soon. Initially, the CPA plans to resign to avoid disclosures to auditors, believing they will uncover the issues.
The AICPA Code of Professional Conduct mandates applying a 'threats and safeguards' approach. This scenario presents a self-interest threat (desire to keep the job, stock options) and an undue influence threat (supervisor's pressure). Given the materiality of the adjustments, the threats are significant, as they could lead to a material misrepresentation of facts or violations of regulations.
The code outlines specific steps: first, discuss the matter with the person taking the position (the supervisor). If the threat isn't eliminated or reduced, discuss concerns with higher levels of management (e.g., supervisor's superior, senior management, or those charged with governance). The video notes that in the scenario, no follow-up with higher management occurred, deviating from the guidance.
If threats remain unaddressed, implement additional safeguards. This includes utilizing internal policies and procedures, which may involve reporting systems like fraud hotlines. Resigning prematurely, as the CPA considered, might not be the most appropriate first step. Responsibilities to third parties (e.g., granting agencies, external auditors) and consulting legal counsel should also be considered, with thorough documentation of the situation.
If no safeguards eliminate the threat, discontinuing the relationship with the employer may be necessary. However, resignation doesn't absolve the CPA of other communication requirements (e.g., to regulatory authorities or external accountants). The video stresses that CPAs are responsible for their actions and must not knowingly misrepresent facts, make misleading entries, fail to correct false statements, or sign documents containing false information. Candor with external accountants and full disclosure of material facts are paramount.