Tommy Hubbs is the new controller of XYZ Corporation. Recently, Hubbs was approached by Carol Franks, the CFO, and told in no uncertain terms to record $100,000 in revenue at the end of 2015 even though the sale was not made until January 3, 2016. Describe Hubbs's ethical responsibilities in this matter if he is a CPA?
What will be an ideal response?
Hubbs's ethical responsibilities as a CPA is first to the public interest. Ethical standards require that Hubbs act with objectivity and integrity. Under Interpretation 102-4 (Exhibit 3.13), he should report the wrongdoing to the CEO and make every effort to correct the matter. If nothing changes, then Hubbs would follow the prescribed procedures under Section 10A of the Securities Exchange Act of 1934 and do the following:
1. Determine whether the violations have a material effect, quantitatively or qualitatively, on the financial statements.
2. If yes, has management, or the board of directors, caused management to take remedial action, including reporting externally if necessary?
3. If no, then the auditor must make a formal report of its conclusions and provide the report to the board of directors. The board then has one business day to inform the SEC and provide a copy of the communication to the external auditor.
If the auditing firm does not receive a copy within one business day, then it has two chose:
1. Provide a copy of its own report to the SEC within one business day, or
2. Resign from the engagement and provide a copy of the report to the SEC within one business day of resigning.
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