Question: Assume that you were recently hired as a staff accountant

Assume that you were recently hired as a staff accountant for Environmental Solutions, Inc. You report to Karen, the director of financial reporting, who in turn reports to the CFO. One of your first assignments is to prepare the adjusting entries for the end of the second quarter and to draft the income statement. Karen instructs you to let her know as soon as you have the estimated earnings for the quarter. She says she will need to review the adjusting entries and earnings calculation with the CFO.
After reviewing your work with the CFO, Karen tells you to change the entry that you recorded for depreciation expense on the company’s fleet of trucks from $229,000 to $184,000. At first you thought that you must have made some mistake in calculating the amount of depreciation, so you recheck your calculations. Surprisingly, you come up with the same amount again. So, tactfully, you ask Karen for an explanation for the change. She tells you that depreciation is only an estimate and that the CFO will change his mind about estimates based on earnings.

1. What is the effect of the change in the amount of the depreciation expense on the company’s second-quarter earnings?
2. What is the ethical dilemma that you face?
3. What are the alternatives that you might consider and what are the potential consequences of each alternative?
4. What are some of the common pitfalls used to rationalize unethical behavior?

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