"You are the only accountant employed by a small manufacturing firm. You are in charge of keeping the books for the company, which has been suffering from an economic downturn that shows no signs of lightening in the near future. You know that your employer is going to ask the bank for an additional loan so the company can continue to pay its bills. Unfortunately, the financial statements for the year will not show good results, and your best guess is that the bank will not approve a loan increase on the basis of the financial information you will present. Your boss approaches you in early January before you have closed the books for the preceding year and suggests that perhaps the statements can be %u201Cimproved%u201D by treating the sales that were made at the beginning of January as if they were made in December. He also asks you to do a number of other things that will cover up the trail so that the auditors will not discover the padding of the year's sales. You know that these results go against the professional rules, and you argue with your boss. Your boss tells you that, if the company does not get the additional bank loan, there's a very good chance the business will close. That means you and everyone else in the firm will be out of a job. You believe your boss is probably right and you know that, with the current economic downturn, finding a job will be tough for you and almost impossible for others in the company. What are your alternatives? What are the likely consequences of each alternative? How will jobs be affected? What will you do?"

The owner is asking you to commit fraud. I would suggest you look at the penalties for fraud. In my mind, there is no alternative but to refuse. Things that could legally be done are explaining to the bank why the current year was not positive, and to forecast what will happen in the new year and future years. The company can also look at ways to decrease its overhead in the new and future years to improve its bottom line. You could also explore whether there are ways to improve the company's sales.

I keep thinking back on this question. Unfortunately, this situation happens all too often. I'm thinking of a few clients I had where this was the case. When owners becomes desperate thinking they lose their business, they will often make poor decisions. It is your job as an accountant to make sure the owner is aware of what he is asking, why it is wrong both ethically and legally, and why you are refusing to do it.

You can do the things I posted above, and you can also review the statements to see if there were accounting choices in the closed year that can be changed to improve the company's position - an example might be your depreciation methods. You always need to follow GAAP, though. The question also mentions that the company will be audited. The CPA firm would be a source of help in best presenting the statements and ideas to improve the business.

You also want to protect yourself. Be sure to document everything and keep good records of conversations. I had a client recently that was in financial trouble. Their CFO not only hired a lawyer to protect herself, but she also wrote a letter to management which clearly stated the ethical issues in question and her stance on them. This is probably more of a practical issue of what is done in real life than an issue for your ethics class, but something for you to think about.

I originally answered the question that you don't want to commit fraud, but you don't want to violate your ethics either.