a, a ChaplerS Cases 6 C Q Search X + 0 a 'it'ps:t;i:3d.la.ieirtiti:jmheducationnom'ptiL'i'sLea'oi:la'arutijrd'555l2985'e4e45392t5b9457 i} p Aa .. \"-mwuuvu yum..- w luau"... w\" .. myvu......= w. "my"..- v\" v4.1- \"... "V... ..m....w..v..... -n. \"w..." um. Annuv... Nu u...\" Hymn... accounting rules. What was Halliburton's motivation in recording bill and hold transactions? Did it violate accounting rules? Case 3-9 Expense or Capitalize Research and Development Costs (a GVV Case) Jerry Maloney, CPA has been working at Mason Pharmaceuticals for 15 years. Mason is a Fortune 1000 company whose stock trades on the New York Stock Exchange. He came to Mason after starting his career in the audit practice of PwC working on clients in the Pharmaceuticals and Medical Device manufacturing industries. Jerry loves and is very loyal to both the industry he works in and the company he works for. He believes that the drugs they manufacture save lives and he is committed to the continued success of the company. He started out as an Assistant Manager of Internal Audit at Mason, later led the internal audit division, and then moved into the Financial Reporting Department. His hard work has paid off and he was recently promoted to Senior Manager of Financial Reporting, reporting directly to the CFO. His department is responsible for preparing and ensuring the accuracy of all the required lings to the SEC and the NYSE. While his boss must certify the accuracy of the nancials, the CFO relies on Jerry to ensure compliance with GAAP and that all the reporting requirements of the SEC and the NYSE are followed. Jerry is sitting in his oice reviewing a preliminary draft of the lOQ for the third quarter ended September 30, 2021. He is smiling as he reads the report as their Earnings Per Share (EPS) gures have exceeded their projected numbers for the third quarter in a row and he knows upper management will be thrilled. As he sits and contemplates what this might mean in terms of bonuses, raises, and stock valuation, Sharon Diggins, the Manager of Financial Reporting, knocks on his door. He invites her in and she explains that their staff have just found a material understatement of expenses in the draft lOQ. She explains that Research and Development Costs on a new drug to treat Colorectal Cancer had been inadvertently capitalized as direct materials inventory and they needed to reverse that entry before issuing a nal lOQ with the SEC. The reversal will cause them to fall just short of their expected EPS gures. Mason is waiting for approval of the new drug by the U.S. Food and Drug Administration (FDA) that is expected in the fourth quarter. The company exnects this new drug to produce more revenue than anv drug thev have manufactured tn date Sharon explains that the _'.O A n .IJXD 7 12 PM 9/4/2023 9 a, ChapterS Cases 6 C Q Search X + 0 a it'ps:\".pl:3d.la.iemMn:imheducationccm\"puL";1,ea'::3.:la'ariuljrd'555l2985'94- .asdalams CalL'FSE-F'CS' i} p Aa LTGHI. LUIOTCCWJ Lancer nau DEG\" ll'lauVCl'lBl'lLly Caplllllu as UITBGI, materials ll'lVCl'lLUI'y and Lucy needed It) \"WEBB Ll'lal entry DESIGN 15511ng a nal 100 with the SEC. The reversal will cause them to fall just short of their expected EPS gures. Mason is waiting for approval of the new drug by the US. Food and Drug Administration (FDA) that is expected in the fourth quarter. The company expects this new drug to produce more revenue than any drug they have manufactured to date. Sharon explains that the purchasing manager had inadvertently purchased a six months' supply of the primary compound needed to produce the drug starting in the third quarter. The accounts payable clerk recorded the invoice for the compound as Direct Materials Inventory as the intent was to use the materials for the manufacture of the new drug. Under GAAP all such costs need to be expensed as Research and Development Costs up until regulatory approval is received. Jerry is distraught over the fact that the internal audit department did not catch this error sooner. He discusses with Sharon that they will need to investigate the oversight later but right now their larger issue is getting the reports revised. He explains that convincing John Bender, the CFO, that they need to correct this error now will be difcult. Bender is also reviewing the same draft of the lOQ that Jerry has and must be delighted by the apparent results. Jerry is sure he will argue against expensing the cost of the compound. He can just imagine that at a minimum Bender will argue that following GAAP to the letter does not make sense. The intent of the purchase was to produce the drug, which they had started doing in the current quarter. He is sure Bender will state following GAAP will actually reduce the true cost of goods sold next quarter and, therefore, they should leave the cost in inventory. Besides, he will argue, regulatory approval will be forthcoming. Sharon reminds Jerry that capitalizing the costs reduces cost of goods sold in the current quarter and, consequently, overstates gross prot, a violation of GAAP. The SEC will consider it fraudulent nancial and we cannot allow that to happen. She suggests that they put their GVV training to work and try to identify all the arguments that Bender will use to try and convince them to ignore this error and then prepare counter arguments. Jerry agrees and they get to work formulating their plan for discussing this matter with Bender. Page 172 Questions 1. What are the main arguments that Jerry and Sharon will need to counter? That is, what are the reasons and rationalizations they will need to address? _'.6 A n .IJXD X 7 12 PM 9/4/2023 9 Chapter 3 Cases X + 7 X C 8 https://prod.reader-ui.prod.mheducation.com/epub/sn_ea1d8/data-uuid-d156512e851e4e4ea92feb9407dcf3aa#data-uuid-db58e4e1051e4ec8802513: Aa overstates gross profit, a violation of GAAP. The SEC will consider it fraudulent financial and we cannot allow that to happen. She suggests () ) that they put their GVV training to work and try to identify all the arguments that Bender will use to try and convince them to ignore this error and then prepare counter arguments. Jerry agrees and they get to work formulating their plan for discussing this matter with Bender. Page 172 Questions 1. What are the main arguments that Jerry and Sharon will need to counter? That is, what are the reasons and rationalizations they will need to address? 2. What is at stake should they not convince Bender to issue a revised 10Q? 3. What levers do Jerry and Sharon have available to them? Include in your answer a discussion of the provisions under SOX and how they might be used as a lever. 4. If they cannot convince Bender to issue the revised report, what is their next step? To whom should they report this matter to? Include other parties they might be able to involve who will support their position. 5. If they are unable to stop the draft report from being issued as is, what are their options? Case 3-10 Cheating on Internal Training Exams at KPMG What prompted partners at KPMG to facilitate cheating on internal training exams? In 2018, Timothy Daly, a former lead engagement partner, solicited and received questions and answers to the examination from a colleague, who was a second audit partner on one of Daly's engagements teams. After learning of KPMG's internal investigation of its audit professionals' cheating, Daly deleted text messages with his colleague in which the colleague had relayed the questions and answers to the exam, after receiving a notice from the firm requiring Daly to preserve them. Daly also made a misrepresentation to KPMG's investigators, which he subsequently self-corrected. What 106 Q Search 7:12 PM 9/4/2023Analyzing Ethics Cases.pdf X + X C O & https://moodle.louisiana.edu/pluginfile.php/2062441/mod_resource/content/3/Analyzing Ethics Cases.pdf E ED ~ V 1 of 2 - + Automatic Zoom B [ 1 2 >> Analyzing Ethics Cases The process entails careful reading of the facts and making ethical judgments. Here is a general outline of the basic steps followed by the specifics. 1. Identify the Issues 2. Outline the Options 3. Construct Ethical Arguments 4. Evaluate the Arguments 5. Make a Decision Step 1: Identify the Issues 1. What are the major factual issues raised by this case? 2. What are the major ethical issues raised by this case? 3. What are the major accounting issues raised by this case? 4. Who are the major stakeholders in this case? (Stakeholders refer to all individuals whose interest could be affected by the decision made in the case). Step 2: Outline the Options 1. What are the main alternative actions or policies that might be followed in responding to the ethical issues in this case? 2. What are the major views on the ethical issues raised by this case? 3. What facts are unknown or controverted that might be relevant to deciding this case (may require research to determine some facts). Step 3: Construct Ethical Arguments Q Search 7:14 PM 9/4/2023 3 2Analyzing Ethics Cases.pdf X + X C O & https://moodle.louisiana.edu/pluginfile.php/2062441/mod_resource/content/3/Analyzing Ethics Cases.pdf E ED ~ V 1 of 2 - + Automatic Zoom B [ 1 2 >> 3. What facts are unknown or controverted that might be relevant to deciding this case (may require research to determine some facts). Step 3: Construct Ethical Arguments 1. Determine which of the ethical principles/standards apply to this case (i.e., moral development; egoism; virtue; deontology; teleology; justice) 2. Identify the accounting principles (i.e., ethics codes of conduct and GAAP) that can be invoked to support a conclusion as to what ought to be done ethically in this case or similar cases? 3. Determine whether the different ethical standards/accounting principles yield converging or diverging judgments about what ought to be done? Step 4: Evaluate the Arguments for each Option 1. Weigh the ethical reasons and arguments for each option in terms of their relative importance. 2. Determine whether there are any unwarranted factual assumptions that need to be examined in each argument. 3. Determine whether there are any unresolved conceptual issues in each argument. Q Search 7:14 PM 9/4/2023 3 2Analyzing Ethics Cases.pdf X + X C O & https://moodle.louisiana.edu/pluginfile.php/2062441/mod_resource/content/3/Analyzing Ethics Cases.pdf E ED - V 2 of 2 - + Automatic Zoom B [ 1 2 >> Step 5: Make a Decision 1. Decide which of the identified options you would recommend or judge to be the ethically best way to deal with the issue presented in this case based upon which option has the strongest ethical reasons behind it. 2. Determine how a critic of your position might try to argue against it using other ethical reasons and present a rebuttal or counterargument in defense of our judgment. Q Search 7:14 PM 9/4/2023 3 2