Friday Accounting Ethics Case - Cash Basis Client

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This weeks accounting ethics case deals with our professional responsibilities concerning the clients ability to oversee any of the attest services we provide, and for evaluating the adequacy and results of those services.

You are performing the annual year-end audit for your client. You have identified a revenue deferral issue for member subscriptions that will need to be accrued. The calculation will be extremely complex due to there being multiple subscription lengths, subscription pricing tiers, payment options (some were prepaid others were pay as you go) and significant volume. It will also require obtaining data from multiple systems across the organization in order to gather all the information needed to test the underlying data supporting the calculation. When you identify the issue you approach the organization's controller. You explain the accounting treatment and what will need to be done to record the subscriptions properly. The controller responds, 'As you know, we are a cash basis organization. We don't do accruals except for the audit. Just make whatever entry you need to, for us to get a clean opinion.' You bring up the fact that the entry will likely have a negative impact on the organization's bottom line and also that in order to maintain your independence you need the controller to accept the responsibility of evaluating the results of the calculation. The controller responds, 'No problem, regarding the bottom line on the financials, the board never reads them anyway. We don't have the resources to devote to preparing the entry though. That is what we pay you for. Prepare the entry and I will sign off on the results'.

You have assisted clients in preparing closing entries in the past as long as they have signed off on them but in this case you are getting a sinking feeling that the controller and the organization may not have the capacity to take responsibility for services your are providing. You have heard the 'cash basis' sentiment from many clients before but you have always chalked it off to a misunderstanding on the clients part as to the proper use of cash basis for day-to-day operations as opposed to accrual basis for analyzing future cash flows and revenue streams. Now you are beginning to wonder if this is a sign that the client is not competent enough to evaluate and accept responsibility for the accrual basis financial statements. After many hours of work you complete the revenue deferral calculation and email it along with the accompanying journal entry over to the controller to evaluate and sign off on. Within fifteen minutes the controller responds with an email, 'Looks good to me. Let's get the audit wrapped up. I will send the entry sign off in the mail today or tomorrow.' Ethical problem?

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by Alex Vuchnich, CPA, CFE - Alex Vuchnich is the developer of Controlzkit an internal controls anaylsis tool and shares his perspective on how audit and accounting theory, technology and professional ethics interrelate to create forward thinking profitable firms.

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