Larry Clint is the president of Hometown Bank. The bank has several thousand depositors and makes loans to many local businesses and homeowners. Blanche Granite is a partner with a CPA firm hired to audit Hometown Bank. The financial statements the bank proposes to issue for the 2004 fiscal year include the following information.
Loans receivable .... $4,000,000
Total assets ...... 5,000,000
Net income ...... 1,000,000

During the audit, Blanche discovers that many of the loans were made for real estate development. Because of economic problems in the region, much of this real estate remains unsold or vacant. The current market value of the property is considerably less than its cost. Several of the developers are experiencing financial problems, and it appears unlikely that the bank will recover its loans if they default. Blanche described this problem to Larry and proposed a write-down of the receivables to $2,800,000. The $1,200,000 write-down would be written off against earnings for 2004.
Larry is extremely upset by the proposal. He notes the write-off would result in a reported loss for the bank for 2004. Also, the bank would be in jeopardy of falling below the equity requirements imposed by the bank regulatory board to which the bank is accountable. He fears the board would impose major constraints on the bank’s operations. Also, he fears depositors would lose confidence in the bank and withdraw their money, further compounding the bank’s financial problems. He cites several economic forecasts indicating an impending improvement in the region’s economy. Further, he notes the bank’s demise would be a major economic blow to the local economy and could precipitate the bankruptcy of some of the bank’s major customers.
Blanche acknowledges that Larry is correct in his perceptions of the possible outcomes of the write-off. Larry proposes an alternative to Blanche. The bank will write down the receivables by $300,000 for 2004. The remaining losses will be recognized over the next three years, assuming property values have not improved. Larry also tells Blanche that if she is unwilling to accept his proposal, he will fire her firm and hire new auditors. The bank has been a longtime client of Blanche’s firm and is one of its major revenue producers. Blanche also recognizes Larry’s proposal is not consistent with accounting principles.

Required
What are the ethical problems Blanche faces? What action would you recommend she take?