Exercise 1
Given that David, aside from being a full time lawyer, owns a small loan company may lead to
many ethical issues. If looked at closely, the issue lies mostly on how he handles his loan
company. This in turn, may end up causing more damage not only on his work as a loan
company owner but also as a lawyer.
1) The ethical implications may include the small loan company failing. Due to David's lack of
participation in the company, mismanagement of the loan business is highly probable. Thus, it
may end up failing in the long run if David continues to put aside his responsibilities as the
owner.
2) The employees may also end up working less efficiently and effectively because of the lack of
supervision.
3) David himself, will also be at a disadvantage because his full commitment to work will be
affected. At the end of the day, he has to face the problems regarding his loan company which
may in turn affect his work as a lawyer and vice versa. One way or another it won't be possible
to fully commit to either of his work.
Exercise 2
1) Frank Doran is the senior audit manager for Cruz and Santos, CPAs. His promotion
to partner is already planned by the firm with the condition that he continues to perform
at the same high-quality level. Frank has been assigned to audit the Machine
International, one of Cruz and Santos’ most prestigious clients. He found out that the
company uses a revenue recognition method called “bill and hold” that has recently
been questioned by SEC. This method was used by the company for 10 years. There is
a conflict between his engagement partner and him in this matter. The engagement
partner concludes that the method used is appropriate, especially because the client
does not file with the SEC. Frank on the other hand, argues that the method used is
appropriate in prior years, but the new SEC ruling makes it inappropriate in the current
year. The engagement partner takes full responsibility for making the final decision if a
legal dispute ever arises with the condition that Frank will not include a statement in the
working papers that he disagrees with the partner’s decision.
2) Is it ethical for Frank to not follow the requirements and blindly agree to his partner’s
decision or for him to disclose the violated rulings of the SEC by Machine International?
3) Frank Doran
 He might end up not getting his promotion
 Attitude about firm may be affected
Cruz and Santos, CPAs
 They may lose one of their biggest client
Machine International
 The reputation of the company may be damaged
 They may face legal problems regarding their used of recognition method
Frank’s Partner
 A misstatement may arise because of her opinion
 She will suffer and may lose her job in case a legal dispute arise
SEC
 One of the rulings may be violated
 May not check the compliance of the client because they do not file to them
4) Frank’s Available Alternatives
 Agree with his partner’s decision
 Report his partner
 Refuse to continue the engagement
 Each of these options includes a potential consequence, the worst
likely losing his promotion.
5) Consequences Of Each Alternative
 If Frank agrees with his partner’s decision, the client will continue with their
operations without any problem. They can operate continuously because their
unethical use of the “bill and hold” method for the past 10 years can be
concealed through the new SEC ruling. Also, Frank will not be held liable in case
the malpractice of the firm will be found. But the firm will lose its client in case a
legal dispute arises.
 If Frank reports his partner, it may affect his relationship with the other
employees of the firm and will end up having negative impression towards his
future partners.
 Frank Doran may not be able to perform the audit and he will not be able to
correct the misstatement of the client’s financial statement
6) Frank should not blindly accept his partner’s decision. It is only right for Frank to write
a report regarding his findings on the unethical practices of their client. It is not just for
his own sake but also for transparency to the shareholders and other users of the
financial statement, as it is important in their decision making. Nevertheless, it is
necessary to consider the factors that may affect the firm because their actions will end
up being reflected on the firm’s reputation.