ACC 545 Week 1 The CPA's Professional Responsibilities Example

A Controller Asked to Hold the Quarter Open: Professional Responsibilities of a CPA in Industry Under the AICPA Code, State Licensing Rules and the Certification Duties of Public Company Officers

[Student Name]

University of Phoenix

ACC/545: Financial Reporting

Week 1 Assignment

[Instructor Name]

[Date]

The company, its officers and the situation are composites written for a model paper; professional rules, law and research findings come from the sources listed.

A composite manufacturer of industrial pumps, listed on a national exchange, was about to report its third quarter. Sales were about $4 million short of analysts' expectations for the quarter. On the last day of the quarter, the chief financial officer asked the corporate controller, a licensed CPA, to keep the sales ledger open for two more days so that shipments leaving the plant on October 1 and 2 could be recorded as September revenue. He described it as a timing matter that would reverse next quarter and noted that competitors did the same. The request sounded like housekeeping, but it asked the controller to report revenue from a period in which the goods had not yet left the company. This paper applies her professional responsibilities.

The Code and Its Structure

The AICPA Code of Professional Conduct is organized into principles, which describe the profession's responsibilities, and rules with interpretations for members in public practice and members in business. Its principles include responsibilities, the public interest, integrity, objectivity and independence, due care and the scope of services. Part 2 applies to members in business, such as controllers and chief financial officers. It uses a conceptual framework: members identify threats to compliance with the rules, evaluate their significance and apply safeguards to eliminate or reduce them to an acceptable level (American Institute of Certified Public Accountants, 2014).

Identifying the Threats

The request creates several threats. An adverse interest threat arises because the controller's superior is pressing her to act against the rules. A self-interest threat exists because her bonus depends partly on the company meeting targets and because refusing could affect her position. A familiarity threat may exist because she has worked with the chief financial officer for years. The code specifically addresses pressure to subordinate judgment: a member in business may not knowingly misrepresent facts or subordinate her judgment when preparing financial statements.

Applying the Guidance on Subordination of Judgment

The code's guidance describes steps when a member disagrees with a supervisor about the preparation of financial statements. First, she considers whether the proposed treatment would result in a material misrepresentation. Recording October shipments as September revenue would misstate revenue by about $4 million, material to the quarter, and would violate the revenue standard, since control of the goods passed on shipment in October. Second, she discusses her concerns with the chief financial officer. Third, if the difference is not resolved, she raises the matter with someone above the chief financial officer, and if that fails, with the board's audit committee. The guidance also suggests documenting her understanding of the facts, the standards involved, the discussions held and the parties involved, and considering whether to consult counsel and whether to continue her relationship with the employer.

Applying the Revenue Standard

The accounting question is not close. Under the revenue standard, the company recognizes revenue when it satisfies a performance obligation by transferring control of goods to the customer. The pump sales are made on shipping-point terms, so control passes when the pumps leave the plant and title and risk of loss transfer to the customer. Pumps that shipped on October 1 and 2 were under the company's control on September 30. No judgment or estimate could move them into the third quarter. That clarity matters for the ethical analysis: the controller was not asked to choose between acceptable alternatives but to record something that did not happen.

If She Had Complied

Had the controller kept the ledger open, the company would have overstated third-quarter revenue by about $4 million and understated fourth-quarter revenue by the same amount, and its reported quarterly growth would have been false. If the auditors or a later review found the entries, the company would have had to restate, its officers' certifications would have been false and the controller would have been exposed to discipline by her state board and possible enforcement action. The short-term relief the chief financial officer sought would have created long-term harm for everyone involved.

Why the Request Endangers the Company

Under section 302 of the Sarbanes-Oxley Act of 2002, the chief executive and chief financial officers of a public company certify in each quarterly and annual report that they have reviewed it, that it does not contain untrue statements of material fact and that they are responsible for disclosure controls and internal control over financial reporting. A deliberate cutoff violation would make those certifications false. The company would also face restatement, and the external auditors, who test revenue cutoff, might identify the entries and report them to the audit committee.

What Is at Stake for Her License

State boards of accountancy license CPAs and can discipline them for acts discreditable to the profession, including knowingly preparing misleading financial statements. Most states also require continuing professional education, including ethics hours, to renew a license. The controller's license, not only her job, depends on her refusal.

The Steps She Takes

The controller explained to the chief financial officer, in person and then in a short email, that recording October shipments in September would violate the revenue standard and the company's revenue policy and that she could not do it. He did not withdraw the request. She then met with the chief executive officer and, when he deferred to the chief financial officer, requested a meeting with the audit committee chair, as the company's whistleblower policy allows. She documented each conversation with dates. The audit committee chair supported her position, and the quarter closed on September 30 as scheduled. The company reported the shortfall and explained it in its earnings call.

What Research Shows

Feng et al. (2011) studied SEC enforcement cases and found that chief financial officers involved in material accounting manipulations were often pressured by chief executives with strong equity incentives, rather than acting for their own benefit. That finding explains why the code and securities law focus on the pressure point this controller faced: financial officers are often the last line before a misstatement.

Preventing a Repeat

The audit committee took three actions: it asked internal audit to test quarter-end cutoff each quarter, it reminded all finance staff of the whistleblower hotline and it asked the compensation committee to reduce the weight of quarterly revenue targets in bonuses for finance personnel. These steps reduce both the pressure and the opportunity.

Conclusion

The controller faced adverse interest and self-interest threats when asked to record October shipments in September. The AICPA code's guidance on subordination of judgment gave her a sequence of steps: evaluate materiality, discuss, escalate to the audit committee and document. Securities law made the request dangerous for the officers who certify the reports, and state licensing rules made it dangerous for her license. Her refusal, properly escalated, kept the company's statements accurate.

References

American Institute of Certified Public Accountants. (2014). Code of professional conduct.

Feng, M., Ge, W., Luo, S., & Shevlin, T. (2011). Why do CFOs become involved in material accounting manipulations? Journal of Accounting and Economics, 51(1-2), 21-36. https://doi.org/10.1016/j.jacceco.2010.09.005

Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002).