Ethical Dilemma Resolution Framework

Some Notes
Understanding technical details of bill-and-hold transactions is not an objective of this assignment, though you are free to do your own research on these transactions in the oil industry if you are interested.
No more than 3 sentences should be dedicated to the “facts” portion of Step 1.
Keep in mind that George can only decide on his own actions and cannot decide on the actions of other parties in the dilemma.
Because George cannot change what has already occurred, application of the framework should not try to change the facts by suggesting that George should have taken a different step earlier in the case. George is unable to change the past and can only plan for what could happen in the future.
Step 5 requires the brainstorming of alternative courses of action and should not include an evaluation of the various alternatives. Resist the urge to evaluate these alternatives until later steps.
Case Descriiption
After graduating from a large southwestern university in 1995 with a degree in accounting, George began his career at a Big-4 public accounting firm. He worked his way up to audit senior manager before taking a position in the spring of 2005 at a Fortune-500 company (“the Corporation”) as Director of Technical Accounting Research and Training. George was directly responsible for supervising, evaluating, and improving technical research and training for the entire finance and accounting (“F&A”) organization. During his job interview, the Corporation’s Senior Vice President and Chief Accounting Officer (CAO) emphasized that the Corporation had recently faced questions about its accounting practices and needed to “clean up” its accounting. They were looking for someone to keep abreast of SEC and FASB rules and train their in-house accountants at locations throughout the world. George was aware of the negative publicity surrounding the Corporation’s accounting practices, and was wary of their offer. Despite his concerns, based on the CAO’s statements, George thought the job sounded like a great opportunity to “fix a company in need.” Besides, although George did not know them personally, several other former auditors from his firm worked at the Corporation.

Similar to a consultation partner in the national office of a public accounting firm, George was the “go-to” person for questions about proper application of GAAP at the Corporation. His job took him across the globe. Some of his presentations focused on accounting for joint ventures, while others taught proper application of GAAP in revenue recognition. His technical presentations were well-received by the Corporation‟s accountants, who were eager to learn about appropriate treatment of unique, industry-specific transactions and FASB developments. Individual accountants at the Corporation came to George with their questions and he felt that they valued his opinion.

In summer 2005, George reviewed the Bill-and-Hold decision tree the Corporation used to determine timing of revenue recognition. (The decision tree actually violated the Corporation‟s written policy on revenue recognition.) George concluded they were recording revenue prematurely, based on an improper application of GAAP. In short, as part of service contracts with their clients, the Corporation was required to manufacture custom-designed equipment in order to actually perform the required services for their customers. The equipment was manufactured in advance by the Corporation and stored in their warehouses until the service was performed. The Corporation recorded the sale of the equipment when it was manufactured and placed in the warehouse, before it was used in the service.

George considered this treatment to fit the characteristics of a classic Bill–and-Hold scheme, which can result in improper acceleration of revenue recognition. Prior year emails and documents from Internal Audit raised concerns that this practice did not comply with company policy. The same documents made it clear the Corporation responded by adding a clause to their purchase orders in an effort to evidence the passing title of such manufactured repair equipment to the customer at the time the purchase order was issued, although the company’s policy was never changed. Thus, accounting practice remained out of compliance with GAAP. In fact, the passage of title or risk of loss is only one of the seven bill-and-hold criteria, all of which must be met in order to recognize revenue. In addition, the title passage clause did not change prior contracts, whose revenue had already been recorded. George did some additional research and found an article on Bill-and-Hold in the industry, written by a manager at the Corporation’s external audit firm.

Based on his understanding of company practices and his research, George published an internal memo describing his findings; he also sent a copy to the audit firm’s engagement team. The Corporation responded by conducting a survey to analyze the materiality level of the questionable transactions. According to George, they found the issue was widespread and material, as it was 20-25% of total revenue. The third quarter was coming to a close and the external auditors were onsite. George discussed the issue with both the CAO and the audit engagement manager. Both assured him the Corporation would restate revenue and correct the error. However, when the quarterly financial statements were issued, there was no correction or restatement. George was surprised, but received no explanation. The controller, George’s boss, left the Corporation soon after and the CAO refused to meet with George to discuss the matter.

Faced with a dilemma, George considered his choices. He could go along with the Corporation‟s treatment and let the issue drop. In other words, he could take no action, keep his job, and continue to train the Corporation’s accounting staff. He could resign and find work at a different organization, leaving the Corporation to continue to file what George felt were inaccurate statements to the public. Alternatively, George could continue working within the Corporation, trying to gain support for his concerns internally. Last, George could pursue the issue and report his concerns externally, either to a regulatory body or to the media.

George carefully weighed his options. He had not faced a dilemma this serious in the past. His actions would affect his career, his family, the Corporation, and even the investing public. He took his wife and children on a short trip. He thought about the situation and asked himself, “What would my dad do?” In his heart, he just wanted the company to change its accounting practice, but he had been unsuccessful at this. In addition, the external audit manager knew of the situation, agreed with George, and still the audit firm gave the statements a clean opinion. George must make a decision