Ethical Obligations and Decision Making in Accounting, 4/e 1
Case 1-6 Capitalization versus Expensing
Gloria Hernandez is the controller of a public company. She just completed a meeting with her
superior, John Harrison, who is the CFO of the company. Harrison tried to convince Hernandez
to go along with his proposal to combine 12 expenditures for repair and maintenance of a plant
asset into one amount ($1 million). Each of the expenditures is less than $100,000, the cutoff
point for capitalizing expenditures as an asset and depreciating it over the useful life. Hernandez
Questions
Assume both Hernandez and Harrison hold the CPA and CMA designations.
1. What are the loyalty obligations of both parties in this case?
Capitalizing the expense would overstate assets and understate expenses which would
overstate net income. This would cause misleading and false financial statements. As
CPAs, Hernandez and Harrison should have loyalty to the public interest. As employees
2. Assume that you were in Gloria Hernandez’s position. What would motivate you to
speak up and act or to stay silent? Would it make a difference if Harrison promised
this was a one-time request?
Gloria needs the courage to speak up about how it is wrong to capitalize $1 million that
should be expensed. She needs to think of the long term results of what doing this would
do to the company’s and her reputation versus the short term result of greater net income
or a larger bonus. If the items are capitalized and it is later revealed that expensing was
Ethical Obligations and Decision Making in Accounting, 4/e 2
3. What would you do and why?
Hopefully, the students would not go along with the request. However, it is easy to say
that one should not go along with such requests when one is sitting in classroom and not
feeling the actual pressure. Gloria has to consider not only will she lose her job, but new