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Case 4-5
Lee & Han, LLC
Joe Kang is an audit partner for Lee & Han, LLC. Joe is a CPA in the state of Florida and a member of the AICPA. He
recently met with Kate Boller, the CFO of Frost Systems, an audit client of the firm, about the market value of their
inventory. Joe told Boller that a write-down of 50 percent had to be made because the net realizable value of the
inventory was 50 percent less than the original cost recorded on its books. That meant the earnings for the year would
be reduced by $10 million and the client would show a $2 million loss for fiscal year 2013 rather than the current $8
million profit. In a heated exchange with Boller, Joe was instructed not to record any write-down for the year and to
wait until 2014 to see if, in fact, the value of the inventory was 50 percent of its cost. Boller argued that the demand
for the inventory would pick up next year because the economy in Florida was finally recovering from the recession of
2007–2008. Boller told Joe that her boss, Judy Preston, the CEO, had given the order not to write down the inventory.
Joe was told to submit the final financial statements to Boller by the end of the week because the company was going
to use the statements to support a$20 million loan for market expansion.
Joe spent the next few hours thinking about the situation. He was under a great deal of pressure from firm
management to grow the business. Joe knew he would never advance from his junior partner status unless he maintained
the current clients under his control and brought in new business. Joe worried what might happen if he took a tough
position with Boller and Frost Systems and insisted on the write down. What Joe did next troubled him deeply but he
felt there was no other option for him short of jeopardizing the relationship he had built over many years with one of the
largest clients in the West Palm Beach office of the firm.
Joe contacted Barbara Simon, the audit manager on the engagement who is a CPA, and instructed Barbara to
change the audit work papers to not reflect a market decline in the value of inventory. Barbara was shocked by the
request as she always thought of Joe as an honest professional. Even after Joe explained his reasons, Barbara said she
did not feel comfortable making the change. In the end, Joe ordered her to change the work papers or he would see to it
that she received a bad performance review and it would negatively affect her future with the firm.
Questions
1. Evaluate Joe’s actions and motives using ethical reasoning and with reference to the AICPA
Code of Professional Conduct.
Joe is using egoism and rationalizations of firm pressure (to grow business and keep the largest client
happy) to justify acting in his own interest; i.e., moving from junior partner to senior partner. In doing so,
2. Evaluate Joe’s actions from a cognitive development perspective.
Using Kohlberg’s Stages of Moral Development, Joe is reasoning at stage 2, placing his own interests and
those of the client above the public interest. As a partner of the firm, he should consider the appropriateness
3. What would you do if you were in Barbara’s position? Use ethical reasoning to support
your action including your responsibilities as an accounting professional.
Barbara’ integrity is on the line as much as Joe’s. Barbara has overseen the hands-on work of the audit as
audit manager and has drawn a conclusion on the best accounting treatment for the inventory write-down.
Joe is asking Barbara to subordinate her judgment to his (objectivity and integrity violations) and to change
the audit workpapers to support the revised treatment (integrity and possible fraud violations). Joe is
4. Assume Barbara speaks to the managing partner of the firm about the inventory matter
and she tells Barbara to forget about it and just be a team player in this instance. Does
Barbara have any whistleblowing obligations at this point? What ethical issues should
be of concern to Barbara in deciding whether to blow the whistle on Frost Systems and
the accounting firm?
Barbara should report the situation to the ethics, quality control, or oversight committees of the firm.
If the firm does not have committee or a hotline which employees can report such situations, Barbara
should consult outside legal counsel. She may wait 120 days after the discussion with the managing
partner or committees of the firm and use the whistle-blowing section under the Dodd-Frank to
