Three shots rang out, striking Al and his son Jeff. Neither died...yet. It'd be just a matter of time.
As the sight of splattered crimson dominated the senses, all I could think of was, "What journal entries might be needed?"
The facts, as I later came to discover them:
Al Parsons and his equal partner, brother Lou, for over 30 years successfully had operated the Celebrity Loan Company on a quiet street in Beverly Hills, California. Catering to the famous but financially troubled, Celebrity Loan Company quickly became known as "pawnbroker to the stars."
Al and his son Jeff were shot on December 11, Year 1. Al died within 20 minutes, while Jerry languished in Mercy Hospital until his eventual demise on January 10, Year 2. The culprit was a disgruntled patron of Celebrity Loan Company.
Al's medical bills were modest, but Jerry's medical bills eventually reached $688,000 at the time of his death. On December 31, Jeff's medical bills were $200,000. Celebrity Loan Company's financial problems were just beginning.
Lou submitted the medical claims for Jeff to the company's insurer, but the claim properly was denied by the insurance company on December 17, Year 1. The insurer's reason was that the Loan Company's accident insurance policy expressly stated that "all claims that appropriately are, or should be, covered by workers' compensation insurance are hereby not recoverable under this policy agreement." The insurance claims representative was correct. Jeff's injuries clearly fell within the scope of workers' compensation insurance because these injuries occurred on the job in Jeff's employment capacity.
The Loan Company did not carry workers' compensation insurance on Jeff because its accountant inaccurately told Lou that workers' compensation insurance was not needed for a child employed in the family business. Lou and his accountant have been friends for many years. Lou's accountant, a CPA, admits that he told Lou that workers' compensation insurance was unnecessary, and he was wrong. The accountant points out, though, that he gave this advice while chatting during a break from their weekly poker game.
As business partners, Al and Lou had entered into an agreement, called a buy-sell agreement to establish the price that the surviving partner would be required to pay to the other's estate on his death. The buy-sell agreement between the two equal partners sets the buyout price as follows:
"Upon the death of one partner, the surviving partner agrees to purchase the deceased partner's interest for an amount equal to 100% of the deceased partner's Capital Account, as stated in the Company's balance sheet as of the close of the month in which one partner dies. This balance sheet shall be prepared in accordance with generally accepted accounting principles."
The partnership agreement elsewhere defines the phrase "Capital Account" to mean a particular partner's share of the loan company's owners' equity.
Lou received the company's December 31, Year 1 financial statement from the accountant on February 12, Year 2, and paid the buyout price for Al's partnership share shortly thereafter. The balance sheet, as prepared by the accountant, did not reflect any reduction in owners' equity for the liability owed to the hospital for Jeff's medical bills incurred by Jeff while on the job.
Later on, Lou got expert financial advice that the company accountant should have reflected the company's liability for Jeff's medical bills on the company's December 31, Year 1 balance sheet, but the accountant failed to do so.
As a result of the accountant's alleged error, Lou clams that he paid too much money to buyout his partner. Lou now wants the accountant to reimburse him for the amount of this overpayment.
a. When the accountant advised Lou about whether Celebrity Loan Company was required to maintain a workers' compensation policy, both parties were at a poker game. Did the accountant have a duty to give accurate advice on this topic?
b. Assume that the accountant was not an expert in workers' compensation insurance issues, but he wanted to help out Lou, who was his client and friend. Did the accountant violate any Principles of the AICPA's Code of Professional Conduct? Which ones?
c. Assume that the accountant gave this advice to Lou and never billed Lou for the accountant's services. Would your answers above be different?
d. Do you believe that the accountant has an ethical duty to reimburse Lou?
e. How much do you believe that the accountant should pay to Lou?