Chapter 8: Ethical Dilemma

REVIEW QUESTIONS

1. Describe an ethical dilemma? How does a person resolve an ethical dilemma?

An ethical dilemma refers to a particular circumstance where in an individual faces possible

actions to a problem and is under an obligation to select the appropriate one and make an
important decision. Accordingly, such decision shall be made with proper consideration to his
ethical values and its possible repercussions.

2. Why is there a special need for ethical behavior by professionals?

There is a special need for ethical behavior by professionals in order to maintain public
confidence in the profession, and in the services provided by members of that profession. All
professionals are expected to be competent, perform services with due professional care, and
recognize their responsibility to clients.

3. After accepting an engagement, a consultant discovers that the client’s industry is more technical
than he realized and that he is not competent in certain areas of the operation. What are the
consultant’s options?

 Revoke the engagement.

 Acquire the expertise through continuing education and self-studies in order for him to be
suitable for the job.

 Appoint another consultant who is competent, has the expertise, and thus, suitable for the job.
 EXERCISES

1. DAVID LAWYER: Identify and discuss the ethical implications of David’s act.

The ethical implications may include the following:

a. The owner, David Lawyer, has the obligation to spend a reasonable time to his business and thus,
take part with its ongoing and future transactions. And his inability to be responsible and perform
his duties as the owner may result to mismanagement of the loan business. Thus, end up failing
in the long run.

b. The employees of the small loan company may also end up working less efficiently and
effectively because of the lack of supervision and sense of leadership.

c. If David continue to not give his attention to his business and thus, results to it failing, he,
himself may be affected such as his full commitment to his work or his personal life. At the end
of the day, he has to face the problems regarding his loan company which may in turn affect his
work as a lawyer and vice versa. One way or another it won't be possible to fully commit to
either of his work.

2. FRANK DORAN: Six-step approach to resolve ethical dilemma

a. Facts obtained

Frank Doran is the senior audit manager for Cruz and Santos, CPAs. His promotion to
partner is already planned by the firm with the condition that he continues to perform at
the same high-quality level. Frank has been assigned to audit the Machine International,
one of Cruz and Santos’ most prestigious clients. He found out that the company uses a
revenue recognition method called “bill and hold” that has recently been questioned by
SEC. This method was used by the company for 10 years. There is a conflict between
his engagement partner and him in this matter. The engagement partner concludes
that the method used is appropriate, especially because the client does not file with the
SEC. Frank on the other hand, argues that the method used is appropriate in prior years,
but the new SEC ruling makes it inappropriate in the current year. The engagement
partner takes full responsibility for making the final decision if a legal dispute ever arises
 with the condition that Frank will not include a statement in the working papers that he
disagrees with the partner’s decision.

b. Ethical Issue

Is it ethical for Frank to not follow the policy of SEC and just agree with his partner?

c. Who is affected and how is each affected?

WHO HOW AFFECTED

 Promotion may be
affected;
 Relationship and
Frank
attitude with both the
firm and his partner
may be affected.
 A misstatement may
arise because of her
opinion;
Frank’s partner
 She may lose her job in
case a legal dispute
arise
 They may lose one of
Cruz and Santos, CPAs
their biggest clients
 May face legal
charges;
Machine International
 Their reputation may
be affected negatively
 Making of appropriate
Users of Machine International
decision may be
financial statements
affected
 One of their policy
SEC
may be violated
d. Available alternatives of Frank

1. Agree with his partner.

2. Report his partner.
3. Refuse to take part in the engagement or partnership.

e. Consequences of each alternative

1. If he agrees with his partner, Machine International will continue its operation
without any problem as the method it’s using will not be disclosed. Also, Frank
will not be held liable in case the malpractice of the firm will be found as his
partner took responsibility for it. However, the firm will lose one of its biggest
client in case a legal dispute arises

2. If he reports his partner, he will risk his relationship and attitude towards his
partner and probably other employees and his future partners.

3. If he refused to be a partner, he will not be able to correct the method that

Machine International is using and thus, be able to amend its misstatements on its
financial reports. Also, he may not get the promised promotion or such may be
put into delay.

f. Appropriate action

Frank is a senior audit manager. He’s in his job for a long time now and therefore had lot
of experiences already. And for someone in his position, he shall stick to his professional
ethical values. Thus, he should not blindly accept his partner’s decision. Making a
statement and report about unfair and unethical practices of their clients is the right thing
to do.

This act is not just for him but also for everyone that is affected by it especially Machine
International and its users. A true, transparent, and relevant financial result is necessary
for proper decision making. An inappropriate method will have long-term repercussions.
Moreover, the usage of a method that is against the policy and ruling of SEC will result to
a legal dispute.