You are the senior accountant of a large, publicly traded company that is experiencing a decline of business that management feels is temporary. To meet earnings projections given in its previous year’s MD& A, management asks you to find an additional $ 5 million of reported earnings for the current year. After some study, you determine that to increase earnings by this magnitude, it is necessary to recognize additional revenue on contracts in process, even though the contracts are far from completion and it is questionable whether or not any profits will actually be realized. A careful study of accounting standards relating to revenue recognition leads you to the conclusion that to recognize $ 5 million of profits at this stage would not be in accordance with GAAP. Consequently, the auditors will be expected to object.
You report this to management, but are instructed to proceed anyway. Management assures you that next year’s business will be much better and the premature revenue recognition will never be noticed. Furthermore, management is sure it can convince the auditor of this as well.
What will you do in response to this ethical dilemma? Give reasons for and against your decision.