Question: Larry Johnson owns Larry s Limousine which operates a fleet of
Larry Johnson owns Larry’s Limousine, which operates a fleet of limousines and shuttle buses. Upon reviewing the most recent financial statements, he became confused over the recent decline in net income. He called his accountant and asked for an explanation. The accountant told Larry that the numerous repairs and maintenance expenses, such as oil changes, cleaning, and minor engine repairs, had totaled up to a large amount. Further, because several drivers were involved in accidents, the fleet insurance premiums had also risen sharply. Larry told his accountant to simply capitalize all the expenses related to the vehicles rather than expensing them. These capitalized repair costs could then be depreciated over the next 10 or 20 years. By capitalizing those expenses, the net income would be higher, as would property and equipment assets; there fore, both the income statement and balance sheet would look better. His accountant, however, disagreed because the costs were clearly routine maintenance and because they did not extend the fleet’s useful life. Larry then told his accountant that the estimated useful life of the vehicles needed to be changed from 5 years to 20 years to lower the amount of depreciation expense. His accountant responded that capitalizing costs that should be expensed and extending the estimated lives of assets just to increase the reported net income was unethical and wrong. Larry said that it was his business and, therefore, demanded that the financial statements be changed to show more net income. As a result, the accountant told Larry to pick up his files and find another accountant. What ethical concerns did the accountant have? If the total amount of repairs and maintenance were so large, couldn’t a case be made that the amount should be capitalized? Is it unethical to change the estimated life of an asset? Was it unethical for the accountant to sever the business relationship? Do you have any suggestions?
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