You are part of an audit team working on the audit for one of the largest clients in the office. This public client is growing and in the past year has increased its use of leases for equipment. In conducting the audit program for the old and new leases, it appears that both the new leases, as well as the previously recorded leases, meet lease capitalization criteria. The team has had several meetings to review their analysis to ensure that they have the correct answer. The team has concluded that the client will have to capitalize the leases and that prior years' financial statements likely will have to be restated. The client will not be happy about this. The team had raised this as a potential issue earlier in the audit with the senior manager overseeing the audit. He is swamped with other parts of the audit as well as with responsibilities for other audits. At that time, he suggested another approach to the issue based on a materiality argument, i.e., simply say that the issue is not material and then it becomes a "Non-issue."The team explores this and feels it is not the right way to go. The deadline for completing the audit is fast approaching. To date, no one has apprised the client of the dilemma and the increasingly likely prospect that the company will have to report the leases as liabilities and announce a restatement. At the next team meeting you raise the issue of whether it is time to let the client know. The team agrees it is time to have that conversation.
You advise your senior manager of the group's recommendation to alert the client to the problem. He is taken aback as he had not adequately gauged the extent of the problem. He knows that the partner who oversees this client account will have serious problems about this outcome-reporting significantly higher liabilities on the balance sheet and a restatement-especially when the audit firm had signed off on the lease accounting in prior audits. It is well known that this is one of the more important audit clients in the office, as well as the most important client for which this partner is responsible. The senior manager says that he is overcommitted with other crucial projects. He again pushes the materiality "solution" to the problem. That is, like in prior years, it can be argued that although the accounting is wrong, the adjustment is not material and can therefore be ignored. You and the team are very uncomfortable with this response and you begin to wonder if the partner shares the senior manager's view.
You are vividly aware of the reputation this partner has for being tough on managers who bring bad news. Thus, you are not at all sure that he will buy the team's recommendation. Yet, it is the team's conviction that failing to notify the client of the problem in a timely manner may lead to a serious breach in the client's relationship with the firm, and possibly to accusations of negligence.

Required
a. Summarize the ethical difficulty posed in this case scenario.
b. What are the options for approaching the partner in this situation without undermining the engagement team's relationship with the senior manager?
c. What arguments would you make that appeal to the partner's values?