Overview
The Minor Project Case #1
Kathy Warner sent the tax return that she prepared for the president of Mount Olive Industries, Inc., Ryan Allrich, to Harry Smith, the manager of the tax department at her accounting firm. Harry asked Kathy to come to his office at 9 a.m. on Friday, April 12, 2019. Kathy was not sure why Harry wanted to speak to her. The only reason she could come up with was the tax return for Allrich.
“Kathy, come in,” Harry said.
“Thank you, Harry,” Kathy responded.
“Do you know why I asked to see you?”
“I’m not sure. Does it have something to do with the tax return for Mr. Allrich?” asked Kathy.
“That’s right,” answered Harry.
“Is there a problem?” Kathy asked.
“I just spoke with Allrich. He told me that you want to report his winnings from the lottery. He was incensed.”
“Why?” Kathy asked. “You and I both know that the tax law is quite clear on this matter. When a taxpayer wins money by playing the lottery, then that amount must be reported as revenue. The taxpayer can offset lottery gains with lottery losses, if those are supportable. Of course, the losses cannot be higher than the amount of the gains. In the case of Mr. Allrich, the losses exceed the gains, so there is no net tax effect. I don’t see the problem.”
“You’re missing the basic point that the deduction for losses is only available if you itemize deductions,” Harry said. “Allrich is not doing that. He’s using the standard deduction.”
Kathy realized she had blown it by not knowing that.
Kathy didn’t know what to say. Harry seemed to be telling her the lottery amounts shouldn’t be reported. But that was against the law. She asked, “Are you telling me to forget about the lottery amounts on Mr. Allrich’s tax return?”
“I want you to go back to your office and think carefully about the situation. Consider that this is a one-time request, and we value our staff members who are willing to be flexible in such situations. And, I'll tell you, other staff in the same situation have been loyal to the firm. Let’s meet again in my office tomorrow at 9 a.m.”
1. Analyze the alternatives available to Kathy using Kohlberg’s six stages of moral development. Assume that Kathy has no reason to doubt Harry’s veracity with respect to the statement that it is “a one-time request.” Should that make a difference in what Kathy decides to do? Why or why not?
2. Analyze the case using GVV 4 steps.
3. Assume you have decided what your position will be in the meeting with Harry but are not quite sure how to respond to the reasons and rationalizations provided by him to ignore the lottery losses. How might you counter those arguments? What would be your most powerful and persuasive responses?
4. Assume that Kathy decides to go along with Harry and omits the lottery losses and gains. Next year a similar situation arises with winnings from a local poker tournament. Allrich now trusts Kathy and shared with her that he won $4,950 from that event. He tells you not to report it because it was below the $5,000 threshold for the payer to issue a Form W-2G. If you were Kathy, and Harry asked you to do the same thing you did last year regarding omitting the lottery losses and gains, what would you do this second year and why?
5. Assume that Kathy decides not to go along with Harry’s request. What are her next steps, and please be specific as you will be in this situation?
6. When you encounter a situation such as this, what would you do? (use textbook material AND scripture to back up your actions).
Minor Project Case #2
The auditors, Smith and Wesson, CPA’s, have audited a mortgage company for the past three years. The company’s management said they had a special way to secure mortgage financing for its clients. The senior audit partner Smith, CPA, knew the chair of the mortgage company as they met and played golf together at several charity golf tournaments in the past. The audit manager James, told Mr. Smith, the partner, that he really did not understand the way the mortgage company was securing mortgages for its clients. One of the senior auditors, Harry, said he did not understand the transactions but gave the responsibility to an intern. The intern, Sarah, did her best to follow what she learned in her one college audit course, but this was her first real audit. Sarah did little to verify the $200 million in assets on the mortgage companies accounting records. By the way, one of the mortgage company’s clients, Mr. Ludwig, held more than 20 percent of the loan portfolio at the mortgage company. Also, during the audit, Smith and Wesson were required to review the work of the internal auditor. The internal auditor was another accounting firm Garner and Gonzales, CPA. Garner and Gonzales were hired to design and monitor the internal controls for the mortgage company, but they did not have a lot of experience in internal controls but accepted the engagement to earn some extra business. But Smith, CPA, reviewed the work of the internal audit accounting firm and accepted it as is. Smith and Wesson conducted no review of the internal audit accounting firm or the function that they performed. Also, Smith and Wesson's failed to conduct a walkthrough to follow up on if the internal controls were working correctly.
Now in 2021, the mortgage company has declared bankruptcy. It was discovered that their new way of securing a mortgage was fraudulent. The public wants the head of the mortgage company and the auditors.
Questions
1. Evaluate this case based on the six pillars of character for each party.
2. Evaluate this case based on the various ethical philosophies for each party.
3. Evaluate the case based on the integrated ethical decision-making framework's four steps.
4. What should Smith and Wesson do in this situation?
5. How are you prepared to handle a similar situation, and what would you do and why? (Please use textbook material AND scripture)
6. Are there any AICPA professional code of conduct and ethics violations in this case?