Biker Nightmare (Chapter 6, pages 464-465)

What this case has to offer

Most Professional Accountants (PAs) have found themselves in the position of discovering an illegal act,
and have wondered what to do about it. In this case, the company president has asked for you to
summarize a number of illegal transactions, and to sign the summary. If discovered or reported to the
authorities, it is likely that the $200,000 will have to be paid, as well as some additional fines. The duties
and fines may be considered to be contingent liabilities and will have to be disclosed. If the president
does not correct this situation after being informed, then the issue should be reported to the auditor
and Audit Committee of the board after informing the president.

The request to sign the summary is interesting, in that it will indicate when the PA came to know about
the problem – a fact that will be important to assess how quickly and, therefore, responsibly the PA has
acted. If a PA doesn’t act, the president could demand future favors such as improper accounting
adjustments in return for not informing the Professional Accounting body. A PA would need to be
aware of this risk. Whether or not you have signed the summary does not change your professional
duty.

Discussion of ethical issues

1. What does our professional code say about this?

Most codes contain general, if not specific, provisions against acting in or covering up an illegal
transaction. Such actions would contravene expected standards of integrity, behavior in the
public interest, protection of the good reputation of the profession, and fiduciary duty to the
company’s board. Also, there is a specific provision in most codes that a PA should not be
involved in a misrepresentation, which would be the case if the practice continues.

2. If this issue is uncovered by the government regulatory authorities, will I be implicated?

Potentially yes, depending on the statute or regulation, and the rigor of the professional
accounting body involved.

3. Should I quit my job and then go and report this situation to the regulatory authorities?

Not unless the president refuses to change the practice after you advise him or her of the
problems associated with it. Even then, you should advise the Audit Committee of the board so
that the practice cannot continue without their knowledge and consent. They are relying on you
for that advice. Ultimately, the PA has to decide whether to stay or resign and when, but even if
the PA leaves, the PA should advise the president and the Audit Committee of the problem.