Sunbelt Bank recently appointed the accounting firm of Baker, Jackson, and Trent as the bank's auditor. Sunbelt quickly became one of Baker, Jackson, and Trent's largest clients. Subject to banking regulations, Sunbelt must provide for any expected losses on notes receivable that Sunbelt may not collect in full.
During the course of the audit, Baker, Jackson, and Trent determined that three large notes receivable of Sunbelt seem questionable. Baker, Jackson, and Trent discussed these loans with Stephanie Carson, controller of Sunbelt. Carson assured the auditors that these notes were good and that the makers of the notes will be able to pay their notes after the economy improves.
Baker, Jackson, and Trent stated that Sunbelt must record a loss for a portion of these notes receivable to account for the likelihood that Sunbelt may never collect their full amount.
Carson objected and threatened to dismiss Baker, Jackson, and Trent if the auditor demands that the bank record the loss. Baker, Jackson, and Trent want to keep Sunbelt as a client. In fact, Baker, Jackson, and Trent were counting on the revenue from the Sunbelt audit to finance an expansion of the firm.
Apply the framework for making ethical decisions outlined in the Decision Guidelines in Make an Ethical Business Judgment on page 176 to decide how the accounting firm of Baker, Jackson, and Trent should proceed.