Question

The Situation:

Certified Public Accountants (CPA’s) provide valuable services for their clients, both businesses and individuals. Although it’s important to make client’s happy, accountants have additional considerations when preparing financial statements and tax returns.

The Dilemma

Aaron Ault, is the owner of a small contracting business. In late January 2016, he delivered original expense and income records so that his CPA Katrina Belinski could prepare 2015 financial statements and tax returns for Ault’s small business firm. Several weeks later, Katrina delivered the complicated financial returns statements and tax returns to Ault. Aaron was pleased with the financial statements but realized that he was going to owe a lot of money in taxes. His business is just recovering from tough times and can’t afford to pay a large tax bill. One particular large job was completed at the end of the year, and Ault decided that he’d like to record this during the current year. This would result in a much lower taxable income for 2015. However, Ault is disappointed with Belinski, who tells him that she is not able to make this change. Now he is threatening to take his business elsewhere. Belinski is torn because Ault has been a long-time client and she does not want to lose his business.

1. What are the ethical issues in this situation?
2. What are the basic arguments for and against Ault’s position in this situation?
3. What are the basic arguments for and against Belinski’s positions?
4. What do you think that Ault and Belinski should do in this situation?

Answer 1

Ethical issues:

I could find certain ethical issues in the situation of Aaron Ault and Katrina Beliski, Katrina is a CPA professional and has to follow certain ethical rules such as responsibilities for the work done, integrity, objectivity, and independence, the public interest. Hence Katrina is completely liable for all the work done has to make sure that all her work is done is always in the favor of the public interest with complete integrity. Aaron Ault even though is a small contractor has certain ethics to follow such as moral ethics, applied ethics which includes responsibilities towards the country and its economy. They also have to follow transparency to earn the trust of the public as well as the government.

Basic arguments for and against Aron Ault:

Aaron Ault has a small contracting business. Arguments in favour of Aaron is that being a small business he wants the business to be transparent and according to the norms and conditions provided by the government. There can also be an argument stating that he has incurred heavy losses in the current year and hence the huge tax liability will increase the burden in him, this will result in increased stress , the pressure to pay the tax liability. This may also prove to have a psychological effect on the owner that conducting business in transparency will cost him huge tax liability, which will discourage him, later on, to carry out a transparent business. Some of the arguments against Aaron Ault are that government has set certain rules to be followed not to be broken. It is rather important to pay tax because that is the income he has earned through the business he has carried out. The excuse of having borne extreme losses or recovering from tough times can be ruled out because of his income in the current year.

Basic arguments for and against Katrina Belinski:

Katrina Belinski is a CPA professional. A CPA professional works under a certain framework of the law. Some arguments in favour of Katrina are her responsibility towards morals and ethics is proper. She could have suppressed the issue with Aaron using her power but she decided not to. She also was determined to not to reverse her decision against the rules of CPA. Some of the arguments against Katrina is that she could have explained the importance of paying tax liability and being transparent to Aaron. With her knowledge he might change the expenses so indirectly Katrina will also be liable for the same.

What should be done:

In my opinion, Aaron should be less worried about tax liability because business is versatile and can earn high profits at times and also earn less at times. The concern of Aaron that tax liability will be a burden is just a phase he can earn more profits in the next year and compensate for the losses and liability. He has a good amount of income in the current year and hence in the coming years, the tax liability will not be a burden as it seems now as businesses are prone to the development. Katrina should stick with her decision to not hide some expenses and show in another year this will increase the trustworthiness in the market.

Hence, in conclusion, Aaron should comply with the rules and realize the tax liability in the current year.