Ethical Obligations and Decision Making in Accounting, 4/e 1
Case 7-2 Solutions Network, Inc.
“We can’t recognize revenue immediately, Paul, since we agreed to buy similar software from
DSS,” Sarah Young stated.
“That’s ridiculous,” Paul Henley replied. “Get your head out of the sand, Sarah, before it’s too
late.”
Sarah Young is the controller for Solutions Network, Inc., a publicly owned company
headquartered in Sunnyvale, California. Solutions Network has an audit committee with three
members of the board of directors that are independent of management. Sarah is meeting with
Paul Henley, the CFO of the company on January 7, 2016, to discuss the accounting for a
software systems transaction with Data Systems Solutions (DSS) prior to the company’s audit
for the year ended December 31, 2015. Both Young and Henley are CPAs.
Background
Solutions Network, Inc., became a publicly owned company on March 15, 2011, following a
successful initial public offering (IPO). Solutions Network built up a loyal clientele in the three
years prior to the IPO by establishing close working relationships with technology leaders,
including IBM, Apple, and Dell Computer. The company designs and engineers systems
software to function seamlessly with minimal user interface. There are several companies that
provide similar products and consulting services, and DSS is one. However, DSS operates in a
larger market providing IT services management products that coordinate the entire business
infrastructure into a single system.
Solutions Network grew very rapidly during the past five years, although sales slowed down a bit
in 2015. The revenue and earnings streams during those years are as follows:
Year
Revenues (millions)
Net Income (millions)
2010
$148.0
$11.9
2011
175.8
13.2
2012
202.2
15.0
2013
229.8
16.1
2014
267.5
17.3
2015 (projected)
The Transaction
and Ed Fralen, the CEO.
Accounting Considerations
In her discussions with Henley, Young points out that the auditors will arrive on January 15,
2016; therefore, the company should be certain of the appropriateness of its accounting before
that time. After all, says Sarah, “the auditors rely on us to record transactions properly as part of
their audit expectations.” At this point Henley reacts angrily and tells Young she can pack her
bags and go if she doesn’t support the company in its revenue recognition of the DSS
transaction. Young is taken aback. Henley seems unusually agitated. Perhaps he was under a lot
as well.
After the discussion with Shannon, Sarah considers whether she is being too firm in her position.
On the one hand, she knows that regardless of the passage of title to DSS on December 31, 2015,
the transaction is linked to Solutions Network’s agreement to take the DSS product 30 days later.
While she doesn’t anticipate any problems in that regard, Sarah is uncomfortable with the
Ethical Obligations and Decision Making in Accounting, 4/e 3
recording of revenue on December 31 because DSS did not complete its portion of the agreement
by that date. She has her doubts whether the auditors would sanction the accounting treatment.
Questions
1. What are the main arguments Sarah is trying to counter? That is, what are the
reasons and rationalizations she needs to address in deciding how to handle the
meeting with Paul?
Solutions Network’s projected revenues and net income for 2015 is below that of 2014. This
created the pressure imposed by Paul Henley on Sarah Young to record the transaction between
the Company and Data Systems Solutions (DSS) prematurely as revenue. Henley has been quite
aggressive with Sarah threatening to fire her if she doesn’t go along with Henley’s demands.
2. What is at stake for the key parties in this case? What are Sarah’s ethical
obligations to them?
Paul’s position is at stake. He probably made promises in conference calls with financial analysts
that earnings for 2015 would exceed expectations. Sarah’s reputation is at stake. She has already
compromised her values once before when she went along with recording accelerated revenue at
the end of 2014. Now, she’s being asked to do it again. Sarah needs to consider that Paul will
probably use her culpability against her if push comes to shove.
Ethical Obligations and Decision Making in Accounting, 4/e 4
3. Should Sarah follow Shannon’s advice? What if she does and Paul does not back
off? What additional levers can she use to influence Paul and make her values
understood?
Shannon’s advice is solid but does not go far enough because she doesn’t suggest how Sarah
might go about convincing Paul to not record the revenue earlier in 2015. Shannon was right to
recommend that Sarah consider just what are her ethical responsibilities in the matter. However,
Paul is also a CPA and will know what these are all too well.
Sarah has to explain to Paul that she is obligated to stand firm on her position. She compromised
her values once but can turn the ship around this time by not giving in to the pressure imposed by
Paul.
4. What is the most powerful and persuasive response to the reasons and
rationalizations Sarah needs to address? To whom should the argument be made?
When and in what context?
Sarah’s most powerful response is to emphasis the improper accounting and slippery slope
argument. Paul may be the victim of motivated blindness and fail to see the ethical dimensions of
the revenue recognition issue. Sarah can explain it to Paul in a diplomatic way and see if it opens