CASE 2.8
BELOT ENTERPRISES
Synopsis
David Robinson, an audit senior assigned to the audit engagement team for Belot Enterprises,
faces a dilemma common to auditors. Client management has taken an aggressive position regarding
the period-ending balances of several large discretionary expense accruals, including the company’s
allowances for bad debts and inventory obsolescence. Robinson discovered the client’s new accrual
Zachariah Crabtree, Belot’s longtime accounting general manager, came up with the idea to
“tighten” the quarter-ending accruals as his contribution to the Nail the Number campaign. Crabtree
is the primary client contact person for Robinson at Belot. Over the past several years, Crabtree has
been very generous with his time to Robinson, resulting in a strong friendship developing between
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Case 2.8 Belot Enterprises 163
Belot Enterprises—Key Facts
1. David Robinson is an audit senior assigned to the audit engagement team for Belot Enterprises,
a wholly-owned subsidiary of a large public company, Helterbrand Associates.
2. Robinson is in the process of completing the review of Belot’s financial statements for the
company’s second quarter.
4. Zachariah Crabtree, Belot’s accounting general manager, explained to Robinson that the June
5. In the past, Belot established the five accruals at a conservative level, that is, the accruals were
overstated somewhat.
6. For the current quarter, Crabtree chose to eliminate the “fat” from the accruals to help Belot
8. Allen’s Nail the Number Campaign included several measures, such as incentive-based
9. Allen was pleased with Crabtree’s decision to lower the discretionary accruals; in fact, the Nail
10. Robinson’s decision on how to deal with the accruals “issue” is complicated by the fact that
11. Further complicating Robinson’s decision is the fact that he was recently told by the Belot audit
engagement partner that he is partner “material.
12. Robinson is conflicted by his loyalty to Crabtree and his desire to impress the audit partner by
“standing up” to Crabtree.
164 Case 2.8 Belot Enterprises
Instructional Objectives
2. To examine the ethical principle of “integrity” as it relates to auditors and client personnel.
Suggestions for Use
A key objective of this casebook is to introduce students to the “real world” of the auditing
discipline. This case provides students with a window on that that world by demonstrating how a
relationship between a senior auditor and a key client contact person (accounting general manager)
affects the dynamics of the given engagement. To make this case even more “real” for your students
Suggested Solutions to Case Questions
1. What I hope students recognize in addressing this issue is that Robinson’s suggested
compromise does not appear to be based upon a thoughtful analysis of the underlying accounting and
financial reporting issues or concepts. For example, Robinson’s compromise does not explicitly
address the question of whether the change to the “precise point estimate” method had a material
impact on Belot’s operating results for the second quarter [granted, it seems fairly obvious that it
Case 2.8 Belot Enterprises 165
2. You may want to point out to your students that “integrity” is one of the ethical principles
included in the AICPA’s Code of Professional Conduct. The discussion of that ethical principle
within the Code provides a context in which to address the questions of whether or not Crabtree and
Robinson possess integrity. According to ET 54.02-03 [Note: In the Proposed Revised Code of
Professional Conduct these same two paragraphs are found at 0.300.040.03-.04.]
Integrity requires a member to be, among other things, honest and candid within the constraints
of client confidentiality. Service and the public trust should not be subordinated to personal
Given the information in the case, it is difficult to build a strong argument that Crabtree lacks
integrity. Nevertheless, there are certainly some “issues” that can be raised regarding his ethical
fiber. Students typically suggest that Crabtree’s integrity is brought into question by the fact that he
“violated” the chain of command rule when he discussed the accruals issue directly with Allen rather
than raising the matter first with his immediate superior, Travis Logan. Other students typically use
an “end justifies the means” argument to defend Crabtree’s conduct. Crabtree was almost certainly
aware that Logan would quash the idea of tightening the accruals, so, in the interests of the “greater
good,” he bypassed Logan and went directly to Allen. Another “minus” in evaluating Crabtree’s
Is Robinson a “person of integrity”? Students are typically more critical of Robinson than
Crabtree. Given the facts of the case, Robinson seems to be strongly motivated by “personal gain.”
Again, as pointed out in the solution to Question 1, Robinson’s compromise proposal is not
predicated on “good” accounting but rather on helping him both appease his friend (Crabtree) and
“score points” with his superior (Hansen). In sum, Robinson seems to be “subordinating” his role as
the public’s financial watchdog to his own personal gain or interests.
166 Case 2.8 Belot Enterprises
3. As a point of information, two of the “accruals” referred to in this case are not accrued liabilities
but rather “accrued” valuation accounts. These two accounts are the allowances for bad debts and
for inventory obsolescence. The other three discretionary accruals referred to in this case (the
accruals for coupon redemptions, employee vacations, and product warranties) are accrued
liabilities. The offsetting debits for each of these period-ending “accruals,” however, all have a
downward effect on an entity’s earnings since they involve expense accounts.
4. The purpose of a review engagement is to obtain a reasonable basis for providing limited
assurance that a given client’s financial statements have been prepared in conformity with generally
accepted accounting principles. Essentially, a “clean” review report provides negative assurance,
that is, it discloses only that the auditor (CPA) did not discover any evidence suggesting that the
financial statements are materially misstated. Of course, the objective of an audit is much more
affirmative in nature. A full-scope independent audit is designed to provide a reasonable basis for
expressing an “opinion” concerning whether or not a client‘s financial statements have been prepared
in accordance with generally accepted accounting principles.