Kite Corporation’s auditor, PA1, formed the opinion that Kite should accrue for estimated future costs to clean up an environmental problem on one of Kite’s properties in its 20X3 financial statements. Kite requested a second opinion from PA2 on this issue. PA2 gave an opinion that the estimated liability amount is contingent on various future events that are highly uncertain, such as changes in environmental regulations and environmental cleanup technologies. Thus it is a contingency that is too uncertain to accrue and, in accordance with GAAP, it should only be disclosed. Kite’s management sides with the opinion of PA2 because it prevents the company from reporting a loss, allows Kite’s management to receive bonuses for 20X3, and, in their view, it is a more appropriate application of GAAP.
a. Assume that Kite is a public company and PA1 and PA2 are Big Four audit firms. What public perception of auditors may arise if disputes on the application of GAAP can be resolved by the public company’s obtaining an opinion from another auditor?
b. Take the role of PA1. What issues arise by Kite’s taking this action in your dispute over the accrual of the contingent liability?
c. Take the role of PA2. What considerations should you make before issuing your opinion?
d. Take the role of one of Kite’s Directors. What issues arise by Kite’s management’s taking this action in resolving its dispute with PA1 over the accrual of the contingent liability?