4.

As part of the standard of the principle of "objectivity and independence" (Article IV), the AICPA's Code of Professional Conduct requires Martin to be "intellectually honest and free of conflicts of interest." Do you believe that Martin acts in accordance with this principle? In addition, the AICPA's Code of Professional Conduct defines six threat categories that jeopardize compliance with the rules of conduct, especially the principle of "objectivity and independence" (Rules of Compliance Guides, para. 13). Which of these threats are applicable to Martin's situation? I believe that overall Martin did not act in accordance with the principle of objectivity and independence. Martin was intellectually honest and free of conflicts of interest throughout the majority of the case but not in her final decision. Martin, in her impairment testing, found that an impairment loss of $538,005 should be recorded on the books. The company paid $12 million to acquire used POS systems from a bankrupt retail chain. This purchase was funded partially by a $10 million loan. Martin, in order to determine whether lower of cost or market was properly used in recording the inventory, performed testing of the inventory on an individual basis. She used current replacement cost as fair market value. Decline in this value for 3 CPUs caused the significant impairment loss. Martin appropriately followed guidance in completing her calculation. In this sense, she exemplified objectivity. Clearly, the significant impairment loss was going to be a big deal, but she trusted her calculation and realized that it was proper. Martins next step was to talk to Ryan Scott of the Sales Force. She inquired of whether or not the CPUs could be sold at normal profit. Once again, this was an intellectually honest move by Martin. Receiving no evidence that the CPUs would generate normal profit, she went ahead and booked the impairment loss and drafted the financial statements. Martin was fully aware of the effect this would have on the financial statements and the overall financial health of the company. Once again, her decision to go through with the significant impairment loss shows objectivity and clear judgment free of conflicts of interest. Martin was then faced by Lang about the impairment loss. Lang attempted to pressure Martin by explaining how bonuses would greatly be affected by the loss, how debt covenants would be broken, and how the bank was not overly enthusiastic about granting the company the loan in the first place. Martin again acted in accordance with this principle by telling Lang that authoritative guidance must be followed and that she did not like how Lang was pressuring her. The conversation ended with Lang requesting a few days to see if they could sell the CPUs at normal profit. Martin received a note from Lang and his impairment test a few days later. Lang stated that they had solved the problem and asked Martin to reverse the loss. Acting with intellectual honesty and free of conflicts of interest, Martin did not simply accept Langs proposal. She investigated the testing and noticed that the CPUs were selling at prices above cost but that other equipment was selling at prices well below the market value. Martin then contacted Ryan Scott to verify prices. Her desire to seek more information once again shows action in accordance with this principle. She learned that they offered deep discounts to customers on other products if they paid a premium on the CPUs. Further, she learned that they would have never been able to sell the CPUs at those prices without the deep discounts on other products. Martin still felt that the impairment loss should be booked so she requested a meeting with Christina Edmonds. Edmonds told Martin in the meeting that guidance stated that they could apply lower of cost

or market on total inventory. Martin then stated that guidance requires use of the method that most clearly reflects periodic income. Edmonds agreed but told Martin to go ahead and recalculate because she was sure it would solve the problem and CPAs reviewing would not catch the change. Martin did go back and do what Edmonds requested which got rid of the impairment loss. Martin re-submitted the financial statements but felt that she did not do the right thing. Martin acted objectively and independently throughout most of the case but in the end succumbed to pressure. She eventually let conflicts with her superiors, her job, and her loyalty to the company influence her to act in a way she did not agree with.

Out of the 6 threat categories defined in the Code of Professional Conduct, I believe 4 relate to Martins dilemma. The Adverse Interest Threat, which is the threat that a member will not be objective because the members interests are in opposition to the interests of a client or employer, is applicable considering the amount of pressure being imposed on Martin. Martins judgment was opposed by Lang initially and Edmonds in the end. It can be hard to continuously disagree with top management especially when you have a relationship like they do. In the end, Martin did do what was requested of her by Edmonds so clearly this threat was applicable. The Familiarity Threat, which is the threat that because of a long or close relationship with a client or employer, a member will become too sympathetic to their interests or too accepting of their work, is applicable considering that Martin has worked at the company for 8 years and has a close relationship with a lot of top management. A number of the personnel in top management attend various Big State sporting events together. Due to how close the employees are there is a higher chance that Martin would give into her coworkers requests. Lang tried to exploit their relationship by stressing to Martin how bonuses will be affected. Similar to the Familiarity Threat, the Undue Influence Threat, which is the threat that a member will subordinate his or her judgment to that of an individual associated with a client, employer, or other relevant third party because of the individuals (1) reputation or expertise, (2) aggressive or dominant personality, or (3) attempts to coerce or exercise excessive influence over the member, is applicable due to the fact that Lang was previously the right hand man to the founder of the company and, therefore, can have more influence than just from his title. Additionally, Lang clearly had a somewhat dominant personality judging by his attempts to pressure Martin. The Self-Interest Threat, which is the threat that a member will act in a manner that is adverse to the legitimate interests of his or her firm, employer, client, or the public, as a result of the member or his or her immediate or close family members financial interest in or other relationship with a client or the employer, is applicable in more of a minor way. Lang informs Martin how their bonuses could be affected up to $50,000 by the impairment loss. While we do not know how this loss would affect Martin or her family, we can assume that this would be a significant loss. Martin did not act upon this pressure but this threat is still relevant.

5. Article II ("the public interest") in AICPA's Code of Professional Conduct states that financial accountants should serve the public interest and honor the public trust. Who are the intended users of

Martin's reports? How should Martin apply this principle, given her current situation? The intended users of Martins report are the bank that issued the $10 million loan, other future/potential creditors, owners of the company, future/potential investors, regulating agencies, customers, vendors, and employees. All of the aforementioned parties have a stake in the financial status of the company and, therefore, are either direct or indirect users of the financial statements and Martin would then have to keep them in her interest. Given Martins current situation, she must consider how not applying the impairment loss would affect those users judgment and future decision-making. By giving in to Edmonds and Lang, Martin is not acting in the publics interest. The public deserves fair representation in accordance with authoritative guidance. The appropriate calculation of the impairment would have created a significant loss and would have caused the company to break its debt covenants. The alternative calculation proposed by Edmonds gets rid of the impairment loss and would then keep the debt covenants intact. This unfair presentation is not in the best interest of the lending bank, specifically, and indirectly affects the other users because they will not have an accurate representation of the financial status of the company. Debt covenants are established to mitigate some risk assumed by creditors. By choosing the alternative and inaccurate calculation, Martin is not acting in the best interest of the users and is cheating the bank. Martin should have continued to push for the accurate booking of the impairment loss instead of giving in to Edmonds and Lang. 6. Does Edmonds' statement taking full responsibility for the accounting decisions absolve Martin of her ethical responsibilities? Why or why not? All CPAs no matter what their position or title is has the responsibility to adhere to the Professional Code of Conduct. Edmonds may have been a CPA with a lot of experience and may hold a higher position than Martin but this does not excuse either of the women from exercising their best judgment. Further, Martin is certainly not absolved of her ethical responsibilities just because of the pressures placed upon her or because of Edmonds statement taking full responsibility. As a CPA, Martin carries the professional authority to carry out her professional and ethical responsibilities. Martin could have continued to refuse to comply with her superiors demands. Martin certainly had made it evident what the proper calculation should have been. Because Martin gave in, the bank and other users will be slighted. The ethical weight is not all on Martins shoulder but certainly some of it rests on her shoulders.